What is a tax code?
We make sense of tax codes and outline what to do if you think yours is wrong.
Key points
A tax code in the UK is used by employers and HMRC to determine the correct amount of income tax to deduct from salaries, with each code reflecting the individual's tax-free income entitlement
Common UK tax codes include 1257L for standard personal allowance, BR for basic rate on additional income, D0 for higher rate on specific income sources, and NT for foreign workers exempt from UK tax
To ensure accurate tax payments, it's important that you verify and update your tax code via HMRC's online services or customer support, especially when changes occur in your income or job status
What is a tax code?
A tax code in the UK is essential for determining income tax amounts. It is used by Her Majesty's Revenue and Customs (HMRC) and employers. Each code consists of numbers and a letter, indicating tax-free income entitlement per year.
Employers apply these codes to calculate correct tax deductions from salaries. Having the correct tax code is crucial, or you could overpay or underpay tax. This could lead to unexpected bills or refunds during the tax year.
What are the most common tax codes?
The most common tax code for UK employees is 1257L, which indicates a standard tax-free personal allowance.
It allows earnings up to £12,570 annually before tax and applies mainly to individuals with one job and straightforward tax situations.
Other common codes include BR, D0, and NT. The BR code taxes extra income sources at a basic rate of 20%. It is often used for second jobs or pensions.
The D0 code applies a 40% tax rate on all income from a specific source. This might occur with a high-paying second job. The NT code, meaning 'No Tax', applies to foreign workers exempt from UK tax.
How to check your tax code
To verify you're on the correct tax code, check your latest payslip, which usually displays your tax code.
Alternatively, use HMRC’s online services to access your current tax code and other tax details.
If you have any questions or require further clarification, contact HMRC directly. Their customer service team can provide detailed explanations and help with any tax code issues you may encounter.
What to do if your tax code Is incorrect
If you think your tax code may be wrong, here's what you need to do...
Identify an incorrect tax code: First, compare your tax code against your current financial situation. Changes in your income, job status, or benefits might not be reflected. If the numbers don't match, you may need a tax code update
Procedures for notifying HMRC: If you find a discrepancy, contact HM Revenue and Customs (HMRC) immediately. Visit their official website to use the online Income Tax service, or call their helpline. Be sure to have your National Insurance number and a recent payslip ready
Possible outcomes after correction: Once HMRC is informed, they will examine your tax code. If needed, they will issue a correction. This change will ensure your future pay from your employer has the correct tax deductions
When will my tax code change?
Your tax code may change for various reasons. One common cause is the annual updates by HMRC. These adjustments reflect economic and legislative changes. If your income or job status changes, such as a pay rise or a new job, HMRC might update your tax code.
Starting to receive a pension also triggers a change. These updates ensure the correct tax amount is collected. They help maintain tax accuracy throughout the year.
Can I have multiple tax codes?
Yes, it's entirely possible to have more than one tax code. This often occurs when you have multiple income sources.
For example, having two jobs means each employer will use a different tax code. Similarly, receiving a pension while working means each income source has its own code.
Managing multiple tax codes requires careful attention. Each code instructs your employer or pension provider on the tax amount to deduct.
If you think your tax codes are wrong, contact HM Revenue and Customs (HMRC) to address the issue.
Having various tax codes for different jobs can cause complications if not handled well. It's crucial to regularly review your tax codes via your Personal Tax Account on the HMRC website.
This proactive step ensures you pay the correct tax amount and avoid unexpected tax bills at the year's end.