According to recent research(1), approximately 14.3 million people across the UK (44% of employees – 7% in the last year alone) have paid too much tax as a result of being on the wrong tax code. HMRC sometimes makes errors (allegedly 2.8 million times last year) with deductions, or other elements of their calculation such as estimates of State Pension or of interest on savings that are part of your Tax Code calculation. So, what does your tax code mean?
Your tax code will normally start with a number and end with a letter. The numbers in your tax code tell your employer or pension provider how much tax-free income you get in that tax year. So, how are the numbers worked out? First, HMRC works out your tax-free Personal Allowance. Second, income that you have not paid tax on (such as untaxed interest or part-time earnings) and the value of any benefits from your employment (such as a company car) are added up. Third, the income that you have not paid tax on is taken away from your Personal Allowance. What’s left is the tax-free income you’re allowed in a tax year. Fourth, the last digit in the tax-free income amount is removed.
Next, the letter. S: Your income or pension is taxed using the rates in Scotland; C: Your income or pension is taxed using the rates in Wales; L: You’re entitled to the standard tax-free Personal Allowance; M: Marriage Allowance – you’ve received a transfer of 10% of your partner’s Personal Allowance; N: Marriage Allowance – you’ve transferred 10% of your Personal Allowance to your partner; T: Your tax code includes other calculations to work out your Personal Allowance; 0T: Your Personal Allowance has been used up, or you’ve started a new employment and your employer does not have the details they need to give you a tax code; BR: All your income from this employment or pension is taxed at the basic rate (usually used if you’ve got more than one employment or pension); D0: All your income from this employment or pension is taxed at the higher rate (usually used if you’ve got more than one employment or pension); D1: All your income from this employment or pension is taxed at the additional rate (usually used if you’ve got more than one employment or pension); NT: You’re not paying any tax on this income; K: You have income that is not being taxed another way and it’s worth more than your tax-free allowance.
We suggest that you take nothing for ‘granted’! Check that the numbers are correct, especially if they are figures that HMRC has had to estimate. And you can always check your Income Tax for the current year at https://www.gov.uk/check-income-tax-current-year.
(1) Research carried out by Intuit QuickBooks UK earlier this year.
NB The notes above are necessarily brief and only cover some of the main points. If you think any of the above may apply to you, we recommend that you take timely advice from an appropriate professional adviser.
Remember, we are here to help so please do not hesitate to contact us regarding your financial planning situation – Reviews are part of our added-value services for our clients.
We have set out above what is only a brief summary of some key points that involve quite complex considerations. Allowances, caps, levels and bases of, and reliefs from, taxation are subject to change and their value to you will depend upon your personal circumstances. Information and data may change after the date of their original promulgation in our Newsletter or this Focus article. Always seek relevant professional advice before taking, or refraining from taking, any action.
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