Understanding tax codes can be complex, but it doesn’t need to be. Tax codes are in place to help employers deduct the correct amount of Income Tax from your wages or pension. But how do you work out your tax code? To learn more about why we have tax codes and how to work them out, continue reading.
What is a Tax Code?
A tax code is a combination of letters and numbers that represents the tax-free part of an employee’s income, helping employers calculate how much tax must be paid to HMRC.
Although we’re all assigned tax codes, many don’t understand what they mean. This could result in an overpayment of taxes without you realising.
What Do Tax Codes Mean?
Tax codes show how much tax-free income can be earned per tax year. Whatever is earned outside of the Personal Allowance will be taxed.
| Letter | Meaning |
|---|---|
| L | Entitled to the standard Personal Allowance |
| M | Received 10% of your partner’s Personal Allowance |
| N | Transferred 10% of your Personal Allowance to your partner |
| T | Includes other calculations to help work out your Personal Allowance |
| 0T | No Personal Allowance left when starting a new job |
| BR | All your income from one job or pension is being taxed at a basic rate (this applies to those with multiple jobs or pensions) |
| D0 | All your income from one job or pension is being taxed at a higher rate (this applies to those with multiple jobs or pensions) |
| D1 | Income or pension is being taxed at an additional rate |
| NT | No tax is being paid on this income |
Tax rates can also vary in Scotland and Wales. You can see the full list of tax code meanings here (including letters used in Scotland and Wales depending on their income rates).
Example
For example, if you have the most common tax code ‘1257L’, your tax-free allowance is £1,257:
- Numbers 1257: How much tax-free allowance you’re entitled to within a tax year.
- Letter L: You’re entitled to the standard tax-free Personal Allowance.
Emergency Tax Codes
If your tax code ends in W1, M1, or X, then you’re on an emergency tax code. Emergency tax codes are issued by HMRC when they don’t have any information about your income. This could be due to starting a new job or working for an employer after working as self-employed for a while.
Working Out Your Tax Code
So, how do you work out your tax code? Working out whether you have the correct tax code is simple:
- Understand: Gain an understanding of what a tax code is.
- Find: Look for your tax code on a payslip, P45, P60, or by logging into HMRC.
- Check: Make sure your tax code reflects your Personal Allowance.
As discussed, £1,257 is the most common tax-free allowance in the UK. However, if you think yours may be different, you can check your Income Tax for the current year here.
What to Do if Your Tax Code is Incorrect
If your tax code is incorrect, you must contact HMRC as soon as possible. HMRC automatically update your tax code once your income changes, using information from your employer.
However, HMRC can get the wrong information, which leads to you being given an incorrect tax code. To prevent being issued the wrong tax code, ensure HMRC are provided with the correct information about your income.
Why Do We Pay Tax?
In the UK, we mainly pay taxes to help fund:
- Education
- Healthcare
- Emergency services
- Road projects
- Universal credit
- State pensions
- Social security
We must pay our taxes on time. Without taxes, we wouldn’t be able to support the economic stability of the UK or have certain privileges, such as the NHS, state pensions, or benefits.
Key Takeaways
- A tax code is a combination of letters and numbers that represents the tax-free part of an employee’s income
- The most common tax code in the UK is 1257L
- If your tax code is incorrect, you must contact HMRC as soon as possible
Handling Your Taxes
At LJS Accounting Services, we offer personal tax services for you to consider. We understand how difficult it is to stay on top of your tax affairs and ensure the correct amount of money is paid to HMRC. This is why we’re here to step in and support you.
Our friendly and professional team will offer guidance and advice regarding your tax affairs. With over 10 years of experience, you can rely on us to manage your taxes while ensuring you’ve been issued the correct tax code.
To find out more about our tax services, please contact us today. We look forward to hearing from you!
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.
