Introduction
Hey everyone, welcome back to my accounting knowledge blog.
A little introduction into what we’re looking at today, we are delving into the basics of what you tax code means, people see numbers and letters but don’t know what they represent. This is for you if you want to learn more about what your tax code actually means!
Your tax code determines how much income tax is deducted from your salary or pension before you receive it. It is a combination of numbers and letters that reflect your tax-free personal allowance and other factors that might affect how much tax you owe. Here is a breakdown of how to interpret it:
What do the numbers mean?
The numbers in your tax code represent how much tax-free income you are allowed to earn in a tax year before you start paying tax. For example, if your tax code is 1257L:
- You can earn £12,570 in a year without paying tax.
- HMRC divides this amount by 10 to form the number part of the tax code.
What about the letters at the end?
The letters indicate your situation and how it affects your personal allowance:
- L: You are entitled to the standard tax-free personal allowance.
- M: Your spouse or civil partner has transferred 10% of their personal allowance to you (Marriage Allowance).
- N: You have transferred 10% of your personal allowance to your spouse or civil partner. (Marriage Allowance)
- T: HMRC needs to review something about your tax situation.
- 0T: Your personal allowance has been used up, or you have started a new job and your employer does not have the details they need to give you a tax code.
- BR: You’re being taxed at the basic rate (20%) on all your income, typically used if you have a second job or pension.
- D0: You’re being taxed at the higher rate (40%) on all your income.
- D1: You’re being taxed at the additional rate (45%) on all your income.
- NT: You are not paying any tax on this income.
- K: Indicates you have income that is not being taxed elsewhere and exceeds your personal allowance, leading to additional tax being collected.
- ‘W1’ ‘M1’ ‘X’: Any of these 3 at the end of you tax code means that your tax is based on your pay in each pay period not the whole year, this stops you paying too much tax in one go. Your wage slip may show this as W1M1 Week1 Month1.
There are different codes for Scotland and Wales, if you need to understand these codes then please feel free to send me a message and I will happily go through and explain them to you.
What sort of things can change your tax code?
Taking on a second employment: if you have taken a new job whilst continuing your normal job you should expect your tax code to change.
If you have received any employee benefits: if you have been given any type of benefit for example private medical care, you will owe the tax on this benefit, this can be dealt with two ways;
- You will get a tax code change to reflect the benefit, for example your benefit tax was £600, and you were on normal tax code 1257L. Your code will reflect this by deducting your tax-free amount going from 1257 to 1197. Therefore your new code is 1197L.
- Your employee could deduct this from each wage slip, and this will take instalments of what you owe throughout the tax year. In turn HMRC will not change your code.
If you owe tax from a previous year, this may be reflected in your tax code so that HMRC can collect what is owed to them.
There are so many more, if you have any specific tax-code queries that you want to understand then please book in a call and we can have a chat.
Conclusion
So, in conclusion, I hope this blog has helped you understand your code a little more and given you the insight into the reasoning for some changes. There can be more complex tax situations which may differ from the above, in these cases its best practice that you get in touch with HMRC and ask them for a full explanation. Above are only the basics of tax codes. One shoe does not fit all as they say!