Tax codes are important. Employers and pension providers use them to tax earnings and pensions correctly at source. These codes also facilitate tax collection. Don’t understand your tax code? How can you check you’re not underpaying? Or due a refund?
Basic tax code
Life is simplest for taxpayers with one source of income. And for those with a fixed pension. The basic tax code for 2021-2022 is 1257L. The number represents the tax-free amount; £12,570. The letter indicates how your circumstances affect your tax code. Check what your tax code means at https://www.gov.uk/tax-codes.
Tax code notification
Have you experienced a change in circumstances? HM Revenue & Customs (HMRC) won’t necessarily be touch. If your taxable income alters, expect an amended tax code. However, HMRC may not send it to you. Or, indeed, to your employer or pension provider. Remember, don’t assume everyone knows your corrected tax code.
P6 tax code notification
Certainly, your employer or pension provider will get an updated tax code. They won’t receive a copy of your P6 tax code notification. consequently, they won’t know if the new code is based on correct information.
Emergency tax codes
Sometimes an emergency tax code applies. Typically, this happens if you’ve changed employer. Or perhaps you’ve taken on an extra job. The code will end with a W1 (weekly pay) or M1 (monthly pay) letter. For example, 1250M1. An emergency tax code is meant to be temporary. Still seeing it on your payslips? Check it out. If your tax code is wrong, you could underpay. Worse, you might pay more than is necessary.
Have you previously claimed employment expenses? These include professional fees, subscription costs and business mileage. It’s another reason to understand your tax code. Commonly, HMRC will estimate for the following year(s). So, if your employment expenses have changed or ceased, notify HMRC. Otherwise, you may have to rectify an underpayment. And if you’ve overpaid? Reimbursement may not be automatic.
Be aware that HMRC’s systems may estimate additional income during the year. This can affect your tax code. Generally, it happens if you receive a company car benefit. What happens if you change or dispose of the vehicle? Your employer must inform HMRC using a P46 (car) form.
Other taxable income
Receiving additional taxable income of less than £3,000? Perhaps earnings from self-employment. Under certain circumstances you can have it paid through your tax code for the following tax year. Of course, this won’t reduce your overall tax liability. Yet, you won’t have to pay the amount in a lump sum. You can pay interest free over the following 12 months. Simply submit your Self-Assessment paper return by October 31. Or file online by December 31.
Sometimes it’s not possible. If you’ve insufficient PAYE income for HMRC to collect, for example. Or, you’d pay more than 50% of your PAYE income in tax. Or you’d pay more than twice as much tax than usual.
Wrong tax code?
If your tax code is wrong, you could underpay. And that will likely mean an unwelcome tax bill. Or you could pay more than is necessary. You may not get your money back automatically, either. In such cases, you’ll need to claim a reimbursement.
Take the time to understand your tax code. If you think it’s incorrect, act now. Discuss your concerns with your accountant or adviser. Or, get in touch with HMRC direct. Call 0300 200 3300. Alternatively, sign in via your online personal tax account. You can set up an account at https://www.gov.uk/personal-tax-account
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