Do you occasionally receive your tax code in the mail, glance at it, and be unsure of what it means for your tax situation?
It is much more confusing if you have multiple taxed income sources, such as work and a private pension.
Your tax code is a vital document that should be thoroughly reviewed to ensure its accuracy.
If not, you may be paying too much or too little tax. Would you be able to verify your code? Hopefully, this will prove helpful.
Describe a tax code.
Your employer or private pension provider applies a tax code to your monthly or weekly salary or pension, which determines how much of your allowance is tax-free.
In 2021/22, the personal allowance for each individual is £12,570.
Where can I locate my tax ID?
You should receive a letter titled “Your tax code notice” with the applicable tax year and calculation method.
It will display your allowance, followed by any appropriate additions and deductions.
The net amount of the allowance and modifications will be your entitlement to the allowance. This is then transformed into your tax code by omitting the final digit.
If you have no additional taxable income and are entitled to the entire personal allowance of £12,570, for example, your tax code will be 1257 followed by the letter ‘L’.
If you do not receive a letter and have an online tax account with HMRC, for instance, if you file your tax return, then you will find it under the heading ‘Tax Code’.
If you don’t have an online account, you can locate your tax code on your payslip or P60. However, tax codes can vary if your circumstances change during the tax year, so it’s wise to check your payslip every month.
Notably, your employer just receives a letter informing them of your tax code, but not how it was calculated. If you believe your code is incorrect, contact HMRC.
You can do so by calling the Income Tax Helpline at 0300 200 3300 or by visiting the HMRC’s contact us page.
Changes to your tax code
These may be expenses incurred in the course of your employment that your company does not pay.
They may include travel expenditures, uniform costs, private pension contributions for which you do not receive a full tax deduction, and other expenses incurred, exclusively, and necessarily in the performance of your activities.
Deductions from your tax code
These may include employer-provided benefits, such as a company car and private health insurance, taxes owed from a prior tax year, or state benefits.
The state pension belongs to this category. As it is taxable income, it will be deducted from your code, but not taxed at the source.
How might your tax code notification appear?
The coding notice will indicate the source of income to which the code applies, as well as the payer of the money, such as the employer’s name in the example shown below.
The typical letters that follow the tax code and their meanings are described below. If you have many jobs or a job and a private pension, each will have its tax code.
The allotment to which you are entitled will be applied to the source with the highest value first.
What do the letters following the tax code indicate?
L – The regular personal allowance is yours.
T – The tax code incorporates additional calculations to determine your exemption.
You have received a 10% transfer of your partner’s allowance.
N – You have transferred 10% of your allowance to your partner.
M1 (or X) – This is the emergency tax code, under which you will get your allowance but be taxed on your monthly income without regard to past earnings in the tax year.
This implies you may be over- or undertaxed if your monthly income fluctuates or if you started a new job during the tax year.
Your allowance has already been applied to another source of income. It may also indicate that your new employer lacks sufficient information to calculate an emergency tax code.
NT – You are exempt from paying tax on this income source.
BR – You are taxed at the standard rate (20%) on this source of income. This is typically the code for one of your jobs if you have more.
DO – You are paying the higher rate of tax (40%) on this income source.
D1 – You are paying the maximum tax rate (45%) on this income stream.
S – Your salary or pension is taxed at the rates applicable in Scotland.
What exactly is the K code?
This indicates that the deductions from your allowance exceed the allowance itself. See the illustration below.
In this case, £269 will be added to your wages over the course of the year to recover the shortfall in tax from your other income.
Using a K code, your employer cannot take more than fifty percent of your untaxed revenue.
If you have the misfortune of owing more than 50% of your income in taxes, any uncollected tax is carried forward and collected through your tax code until it is paid.
However, if the outstanding tax exceeds £3,000, it cannot be collected through your code and must be paid directly to HMRC.
