Everyone being paid a salary via Pay As You Earn (PAYE) or receiving a pension should be assigned a tax code.
Understanding your tax code and checking that you are on the correct tax code is vital to avoid overpaying PAYE tax. UK tax codes are made up of numbers and letters that HMRC assigns, and they can be confusing.
In this blog, we’ll help you understand why your tax code matters, how to determine if you’re on the wrong tax code, how these tax codes relate to your personal allowance, and how much income tax you’ll pay.
Employers and pension providers use UK tax codes to determine how much tax to take from your taxable income, such as your salary or pension. HM Revenue and Customs (HMRC) sets your tax code, and it will be sent to you, the taxpayer, to check, approve or query. Your employer or pension provider will then use this code to deduct the right amount of tax from your salary or pension each week or month.
For people employed and paid via PAYE, different tax codes may be assigned for each source of income you have. Ensure you keep a note of the corresponding tax code for each source of income.
Self-employed people won’t be assigned a tax code; instead, they will be assigned a Unique Taxpayer Reference number (UTR).
A UTR is a unique number assigned to an individual and remains the same throughout their self-employment period. Because self-employed people don’t earn a fixed salary per month, it’s impossible to calculate their fixed PAYE payments for a year.
Instead, self-employed people have to submit a Self Assessment Tax Return at the end of every tax year. HMRC calculates their tax liabilities from the return, and they are sent a tax bill.
There are a variety of places where you can find your tax code. They can be found here:
Online via the HMRC website if you wish to check your tax code for the current year. You’ll need to sign in to or create an online account.
On your payslip.
On the HMRC app.
P60 or P45.
On a Tax Code Notice letter sent from HMRC.
When checking your tax code online via the HMRC website or in the HMRC app, you can also:
See tax codes for previous tax years.
Sign up for email notifications when your tax code changes.
UK tax codes consist of numbers and letters. Some codes are made up of just letters.
If you have one job or a single pension, you may be on tax code 1257L. This is one of the common tax codes assigned to many people.
If your tax code changes, HMRC will often contact you to explain how they arrived at your new code.
HMRC has an online tax code checker to help you understand what the numbers and letters in your tax code mean. Later in this blog, we’ll be decoding UK tax codes for you, so read on!
You should read this blog to try and understand and decode your own tax code. When you receive a payslip, P60, P45 or tax code letter from HMRC, you can then check and better understand if the code you have been assigned is the correct tax code.
If you think your tax code is incorrect, contact HMRC directly. Your tax code is not your employer’s responsibility; it is your responsibility to check and query your current tax code. Checking your tax code regularly will ensure you’re paying the correct amount of tax.
If your circumstances change, e.g., you finish a job or you start taking a pension, you’ll need to notify HMRC straight away so they can amend your tax code accordingly. HMRC offers some help and advice on tax codes via its online services, including an area to update your circumstances.
HMRC provides an online service called ’Check your Income Tax. ’ You can use this if you think your tax code is wrong, to:
Update employment details.
Notify HMRC about a change in income that may affect your tax code.
You can also:
Add company benefits.
Add missing income or employers.
Claim for employment expenses
Update your estimated taxable income.
Your tax code may change due to updates you make in the online service.
After you update your details online, HMRC will notify you and your employer or pension provider of your revised tax code.
Check future payslips for:
Your new tax code.
Any adjustments to your pay if you were paying the wrong amount of tax.
If you’ve paid too little or too much tax at the end of the tax year, HMRC will send a:
Tax calculation letter (known as a ‘P800’).
A Simple Assessment letter.
HMRC should automatically update your tax code if your income changes, and your employer should notify them. However, if HMRC has the wrong information, you may be given an incorrect tax code.
If your circumstances change, HMRC may take some time to update your tax code. During this period, you may be temporarily assigned an emergency tax code to ensure enough tax is taken from your pay until they confirm the correct code.
Once your correct tax code is assigned, you may find that the emergency tax code means you have paid too much tax. If you believe you’ve overpaid, you can request a tax rebate from HMRC.
The numbers in your tax code notify your employer or pension provider of the amount of tax-free income you get each tax year.
To work out your number, HMRC will consider your tax-free Personal Allowance, alongside any income you have not paid tax on (for example, untaxed interest or part-time earnings). Before assigning a tax code number, HMRC will also consider the value of company taxable benefits that you receive (such as a company car, petrol allowance, private medical insurance, etc)
Below are some of the most common tax codes. There are other non standard tax codes, so check HMRC online for a full list.
When you have a second job, HMRC needs to be notified of which is your main source of income (usually the job that pays the highest salary). This will be where your personal allowance will be applied (if applicable). You’ll generally be taxed on the full amount you earn for your second job.
Pensions can be withdrawn either as a lump sum or in stages. Since pensions count towards your taxable income, it’s worth seeking financial advice to understand the most tax-efficient way to draw your pension.
Yes, you can have different tax codes if you have more than one job.
HMRC will calculate your personal allowance on your main source of income. If you’d prefer your standard tax-free personal allowance to be applied to a different income source, you can request it to be moved.
Ask your employer to update your tax code by sending details about your previous income or pension to HMRC.
You should have been given a P45 when you left your last job. You should give this to your new employer. If you haven’t been given a P45 or it’s your first job, your new employer should ask you to complete a form giving details of your previous employment or benefits.
Your new employer should request that you complete a form with details about your previous employment or benefits.
Firstly, check your tax code online to see if it includes the State Pension or taxable benefits you’re receiving. If you start receiving taxable benefits or your State Pension, you can update your details via the tax code online service.
You’re likely to be given an emergency tax code. This will stay in place until the end of the tax year. HMRC will put you on a non-emergency tax code in the new tax year.
Here at dns accountants we have an experienced team of tax experts to answer all your tax queries, provide you bespoke personal tax advice and help to save you money.
So, why not call us today and speak to an expert to advise you on all your personal tax needs. Book a consultation or contact us today at 033 0088 3616, email contact@dnsaccountants.co.uk
Any questions? Schedule a call with one of our experts.
Sumit Agarwal Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.
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