UK Tax Codes Explained


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Even at the best times, tax can be confusing. This is true for self-assessment and business expenses as well as the various UK tax codes. Each has different implications.

Let’s get to the point – and provide you with all the information you need – this is a guide to income tax codes. It will help you understand yours.

What is a tax code?

A tax code is a combination number and letter that you use to tell HMRC how much National Insurance and Income Tax you should pay.

The tax code is the amount of income that an employee should have tax-free in a single year. Also known as their personal allocation. Anything above this amount will be taxable.

Who gets a tax code?

Anybody employed via PAYE will receive a tax code from their employer via HMRC. This will be displayed on their payslip. Solo traders, on the other hand, don’t need a tax code as they don’t pay PAYE.

What tax code should I use?

Because everyone is different, it can be difficult to answer the question “What should my tax code look like?” This guide explains that your tax code is based on your personal allowance, income earned from another job, taxable benefits received, and money owed from previous years.

If you are eligible, HMRC will usually issue you a tax coding notice each year. This will include pages explaining why yours might differ from the standard tax code for that particular year.

You can find your tax code on the government site even if you haven’t received one. However, this tool is only available to employees who are paid via PAYE.

If you doubt that your tax code is correct, HMRC may still be including taxable benefits that you have not received in the past. In this case, you can contact HMRC directly and request an amended code.

The bottom line is that you may be paying too little or too much tax if your tax code is incorrect. It doesn’t matter what, you need to fix it ASAP.

A list of tax codes and their meanings

There are many UK tax codes. Each one can mean something different. These are the main ones:

  • L: You are entitled to the standard tax-free Personal Allocation (PS12570 for 2021/22)
  • M: Your partner has received 10% of their Personal Allowance
  • N: Your partner has received 10% of your Personal Allowance
  • T: Other calculations are used to calculate your Personal Allowance.
  • 0T: You have used your Personal Allowance or started a new job, but your employer does not have the information they need
  • BR: All income earned from this job is subject to the basic rate Income Tax (20%)
  • D0: All income earned from this job is subject to the higher rate Income Tax (40%)
  • D1: All income earned from this job is subject to the additional Income Tax rate (45%).
  • NT: This income is not subject to tax
  • S: The rates in Scotland will determine the tax you pay
  • C: Your tax rate is in Wales

What does the Tax Code Number refer to?

You might have noticed that the number preceding the letter in your tax code corresponds to a number. What does this mean? This means that the number in your tax code can be multiplied with 10 to show how much income an employee can make before they are subject to tax.

Codes of Emergency Taxes

Sometimes, emergency tax codes are given to tradespeople and construction workers. This temporary status is given to employees while HMRC determines which tax code applies. These are just a few reasons you may be on an emergency tax status:

  • You have started a new job but your P45 has not been received from your previous employer
  • You are starting your first job
  • After being self-employed, you have become an employee and are paid via PAYE.
  • Company benefits such as a van or a car are available.
  • The state pension is paid to you

Your tax code will most likely be one of these if you have been placed on an emergency tax plan by your employer:

  • 1257 W1
  • 1257 M1
  • 1257 X

Our guide to emergency taxes provides more information on the codes and what you should do if one is placed on your behalf.

Common UK Tax Codes

Tax Code 1250L

The most common tax code for employees who have only one job was 1250L in 2020/21. 1250 is based upon the Personal Allowance 2020/21 (PS12,500). L stands for the standard Personal Allowance.

Tax Code 1257L

However, the most common tax code for the 2021/22 year is 1257L. This is because the Personal Allowance was raised to PS12,570.

Tax codes 1256L and 1283L

Your tax code might not be in line with the standard Personal allowance, 1256L or1283L. The taxman granted you tax relief, effectively increasing your Personal Allowance to cover expenses incurred while you were working.

These flat-rate tax reliefs can be useful but they may not match your actual expenses. You may therefore be eligible for a tax rebate.

How are tax codes created?

HMRC takes several factors into consideration, including:

  • You are entitled to the Personal Allowance for that tax year.
  • Earn income from another job.
  • HMRC will estimate your other non-taxable income above PS1,000.
  • Recipients of taxable benefits (e.g. Company car).
  • You can find out if you are due a refund or owe taxes from past years.

 


Amy

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