Tax is a part of life, just like paying rent, mortgage, and electricity bills. Tax can be difficult to understand, regardless of whether you’re self-employed, on a zero-hour contract, full-time employed, or you’re a director of a business.
Chances are, you’ve been paying tax since your first job – but how much do you know about it? Why do people have different tax codes? And how are tax codes decided? Keep reading to learn all about tax, the different tax codes, and what they mean.
Why Do We Pay Tax?
Many of us pay tax but don’t actually know why we pay it or where it goes. There are several types of tax, but income tax goes straight to HMRC. All money that you pay towards tax goes towards funding public services such as the education system, the welfare system, and the NHS.
Income tax also goes towards public projects, whether it be housing projects, road projects, or public transport projects. If you want to see exactly where it’s gone, you can see a breakdown in your annual summary.
What Is a Tax Code?
Most people have had several different tax codes throughout their working lives, but not everybody knows what there are, what they mean, or why they have them.
A tax code is a selection of letters and numbers that you’re assigned by HMRC. This string of letters and numbers allows HMRC to determine how much income tax and National Insurance you should pay per tax period or pay period.
Your current tax code gives you an insight into your tax-free income allowance. Tax codes show much tax-free income you should receive per tax year (aka your personal allowance). Whatever you earn outside of your tax-free personal allowance will be taxed.
The Different Tax Codes
In the UK, there are a variety of different tax codes that have different meanings – the different letters and numbers mean different things regarding tax.
NT – This means that you aren’t paying tax on your current income
S – This letter means that your tax will use the Scotland rates
C – This letter means that your tax will use the Wales rates
M – An ‘M’ in your tax code means that you’ve received 10% of your husband, wife, or civil partner’s personal allowance
N – An ‘N’ in your tax code means that you’ve sent your partner 10% of your own personal allowance
L – This means that you have the standard tax-free personal allowance, which is currently £12,570.
T – This means that your tax code currently includes other calculations that may determine what your personal allowance is
0T – This means that you’ve used your personal allowance, or you’ve begun a new job but haven’t provided your employer with the relevant details yet
BR – ‘BR’ means that you’re being taxed the basic rate (20%) on the income from your current job
D0 – ‘D0’ means that you’re being taxed at a higher rate (40%) on the income from your current job
D1 – ‘D1’ means that you’re being taxed an additional rate (45%) on the income from your current job
How Is My Tax Code Decided?
Your current tax code depends on a variety of factors, but primarily your income. Your income usually determines your personal allowance – and your personal allowance will affect your tax code.
Another factor that can affect your tax code is whether you’ve received any taxable benefits such as a company car – or whether you’re due a tax refund.
If you have an expected non-taxable income that exceeds £1000, this could affect your tax code for the current tax year.
What About Emergency Tax Codes?
If you’ve ever started a new job, you’ve probably been emergency taxed. Emergency tax is a temporary tax status that is used as HMRC decides which tax code you should have.
You’ll be placed on emergency tax if you’ve recently started employment in a new job but your P45 from your previous job hasn’t been processed.
Another reason that you may be emergency taxed is if you’re starting employment for the first time. You can also be emergency taxed once you enter employment and get paid through PAYE after being self-employed.
You may also be emergency taxed if you’re in receipt of the state pension. If you’re being emergency taxed, your tax code will more than likely begin with the numbers 1257.