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Understanding your tax code

Your individual tax code is used to tell HMRC how much tax you need to pay out of your salary. Below we will deal with what yours means, how to check your tax code and what to do if your tax code is wrong.

What is a tax code?

When you receive a payslip you will see that you have been assigned a tax code.

This code determines the amount of PAYE (Pay As You Earn) tax you're charged. PAYE is a system where tax is deducted directly from your earnings or company/private pension before you receive any money.

How to check your tax code

Your tax code is assigned by HMRC and in turn tells your employer or pension provider the correct code in order to collect the right tax.

A tax code is usually shown on your payslip, alongside your pay or pension information. It will also be on the coding notice you might receive from HMRC, the P60 you get after the end of the tax year and the P45 if you change jobs.

Every tax code is made up of letters and numbers.

The number, 1150 for example, should reflect how much tax-free pay you're allowed to earn in each tax year. As a general guide, you need to multiply the number by 10 to get the total amount of income you can earn each year before being taxed.

The personal allowance for 2018-19 is £11,850, so the number for many employees is 1185. But in 2017-2018, the personal allowance was £11,500, meaning your tax code may have been different prior to 6 April 2018. 

The tax code letter gives your employer further information on the type of allowances you receive or the rate of tax that should be charged.

The wrong tax code

If you think your tax code could be wrong, you should contact the HMRC.

It is your responsibility to ensure your tax code is correct. If you’ve overpaid your tax, HMRC will inform you of a refund by post. 

You usually receive payment back through a tax code adjustment. This means you’ll pay less tax and therefore receive more of your wages. But if the refund is for a previous tax year, you’ll be sent a cheque.

However, in the situation where you've underpaid tax, you’ll probably have to pay it back. This could either be done by putting you on an emergency tax code, or by issuing you with a tax bill.

Why do tax codes change?

There are a number of reasons why HMRC might change your tax code. These include:

  • Starting a new job when your new employer doesn’t have a P45: this triggers an emergency tax code, as there is not enough information to see how much you’ve earned and how much tax you’ve already paid during the tax year.
  • Additional income from a second job or pension: if your first job uses up your personal allowance, your second income might be taxed on a different code
  • A changes your income: earning more or less will affect how much tax you’re liable to pay.
  • Starting or stopping benefits from your job: this could affect how much money you receive in your payslip, therefore changing how much tax you need to pay.
  • Starting or stopping taxable state benefits, including:
    • The state pension

    • Widow’s pension

    • Widowed parent’s allowance

    • Bereavement allowance

    • Incapacity benefit

    • Employment and support allowance

    • Carer’s allowance

If you’ve been issued an emergency tax code, HMRC will adjust it once it has enough information to do so. You’ll receive a coding notice to tell you when your tax code has been updated. The sooner you get the emergency tax code adjusted the better.

PAYE coding notice

When your tax code is updated, you may receive a PAYE coding notice in the post from HMRC.

This details the allowances and deductions you are entitled to and which in turn were used to work out your tax code.

Check this carefully, as incorrect information could mean you’re paying the incorrect amount of tax.

Coding notices are usually sent out in the first two months of the year, so any changes can be put into effect by the beginning of the new tax year in April.

You may not get a coding notice at all – if the letter in your tax code is L, P, V or Y, your employer can often just alter your code automatically.

More than one tax code

You will have more than one tax code if you have more than one job or pension.

Your personal allowance will be factored into whichever income HMRC considers to be your main income source. You’ll have to make a request to HMRC if you want your personal allowance to be moved to a different job or pension.

You may find that whoever pays your second income is instructed to deduct tax at the basic rate (20%) or higher rate (40%), using the BR or DO code respectively, if you’ve already used up your personal allowance on your first job. This means you’ll pay tax on all of the money you receive.

Tax-free allowances

Tax-free allowances can affect the amount of income you receive, and therefore how much tax you have to pay.

These can include:

  • Personal allowance
  • Blind person’s allowance
  • Interest payments on qualifying loans
  • Gifts to charity
  • Pension contributions

Benefits attached to your tax code

Your tax code may be used to collect tax on fringe (non-cash) benefits from your employment, such as:

  • A company car
  • Accommodation
  • Loans
  • Medical insurance

These benefits are deducted from your allowances and give you the amount of tax-free pay you are entitled to in a tax year. Your tax code may also be used to collect other tax due.

Your employer will provide you with a copy of your form P11D for your records. You must keep these details for two years after the tax year they relate to.

As always you must inform HMRC if you start or stop getting benefits through your work, as you may be entitled to a new code.