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Tax codes explained: How to find out if you’re paying too much

Heather Rogers is the founder and owner of Aston Accountancy.

Do you ever receive your tax code in the post, look at it and not really understand what it means for your tax position?

It’s even more complicated if you have more than one source of taxed income, for example a job and a private pension.

Your tax code is a very important document and should be checked carefully, to make sure it is correct.

If it is not, you could be paying too much or not enough tax. Would you know how to check your code? Hopefully this will help you.

Decoding your tax code: Where to find it, what to check, and how to challenge errors

What is a tax code?

A tax code is applied by your employer or private pension provider to your monthly or weekly pay or pension, and it determines how much of your personal allowance is tax free.

Each individual has a personal allowance, which in 2021/22 is £12,570.

Where do I find my tax code?

You should receive a letter ‘Your tax code notice’ which will state the tax year the code applies to and how it is worked out.

It will show your personal allowance and then, if applicable, additions and deductions from the allowance.

The net amount of the allowance and adjustments will be the amount of allowance you are entitled to. This is then converted to your tax code, by dropping the last digit of the amount.

For example, If you have no other taxable income, and you are entitled to the full £12,570 of the personal allowance, your tax code will be 1257 followed by the letter ‘L’.

Heather Rogers:  Your tax code is very important and should be checked carefully, to make sure it is correct

Heather Rogers:  Your tax code is very important and should be checked carefully, to make sure it is correct

If you don’t receive a letter and have an online tax account at HMRC, for example if you file your own tax return, then you will access it under ‘Tax Code’.

If you don’t have an online account you can find it on your payslip or on your P60, but bear in mind that tax codes can change if your circumstances change during the tax year, so therefore it’s a good idea to check your payslip, each month.

It is worth noting here, that your employer only receives a notice advising what your tax code is, but not how it is calculated. If you think your code is wrong, then contact HMRC.

You can do this on the Income Tax Helpline 0300 200 3300 or via the HMRC ‘contact us’ page here. 

Additions to your tax code

These may be expenses you incur as part of your job but your employer doesn’t reimburse.

They could include business travel, uniform costs, or private pension contributions you pay but do not receive full tax relief on, or other expenses incurred wholly, exclusively and necessarily in the course of your duties.

Subtractions to your tax code

These could include benefits you enjoy from your employer, like car benefits and private health, or tax you owe from an earlier tax year, or state benefits.

The state pension falls into the latter category. It will be deducted from your code as it is taxable income, but not taxed at source.

What might your tax code notice look like?

The coding notice will show the income source to which the code relates, and the payer of the income, such as the employer’s name in the example below.

£
Personal Allowance 12,570
Additions: Job expenses 200
Deductions Health Insurance 500
Tax free amount 12,270
ABC Ltd: £12,270 is tax free  Tax Code 1227 (followed by a letter). 

The common letters that appear after the tax code and what they mean are explained below. If you have more than one job or a job and a private pension, you will have a tax code for each.

The allowance to which you are entitled will be applied to the largest source first.

So what do the letters after the tax code mean?

L – You are entitled to the standard personal allowance

T – The tax code includes other calculations to work out your personal allowance

M – You’ve received a transfer of 10 per cent of your partner’s personal allowance

N – You’ve made a transfer to your partner of 10 per cent of your personal allowance

M1 (or X) – This is the emergency tax code, where you will receive your personal allowance, but you will be taxed on the income each month without reference to previous earnings in the tax year.

This means you could be over or undertaxed if your income changes each month or you started a new job part way through the tax year.

OT – Your personal allowance has been used up elsewhere against another source of income. It can also mean that your new employer doesn’t have enough information to work out an emergency tax code.

NT – You are not paying any tax on this source of income.

BR – You are paying tax at the basic rate (20 per cent) on this source of income. This is often the code for one of your employments if you have more than one job.

DO – You are paying the higher rate tax (40 per cent) on this source of income.

D1 – You are paying the top rate tax (45 per cent) on this source of income.

S – Your income or pension is being tax at the Scottish tax rates.

What about the ‘K’ code?

This means the deductions from your personal allowance are more than the personal allowance itself. See the example below.

£
Personal Allowance 12,570
Deductions: State Pension 9,339
Other untaxed income 3,500
Tax free amount 269
Tax code 26K 

In this scenario, £269 will be added to your earnings over the course of the tax year to collect the shortfall in tax from the other income.

Your employer cannot take more than half your untaxed income when operating a K code.

If you are unlucky enough to owe more than 50 per cent of your income in tax, then any tax not collected is carried forward and would just be collected through your tax code until it’s paid.

However, if the unpaid tax exceeds the £3,000 tax code collection limit, then it cannot be collected through your code and would need to be paid to HMRC.

If you have difficulty paying your tax, then contact them HMRC. Call 0300 200 3835 or check here.

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