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HM Revenue & Customs (HMRC) provides tax codes to all employers and pension providers to ensure that earnings and pensions are correctly taxed at source and the right amount of tax is collected during each tax year. However, due to recent changes, understanding what your code means and being able to check payments for accuracy may be far from straightforward.

Life is simplest for taxpayers who have only one source of income or a fixed pension. The current basic tax code is 1250L. The tax-free amount is shown as the number and the letter represents how your circumstances affect your tax code.

With the implementation of the Marriage Allowance, (letters M and N) and different tax rates for people whose main residence is in Scotland or Wales (letters S and C), there are now up to 22 tax codes in use. (See full list below).

Tax code notification

Do you always receive it? Whilst it is reasonable to expect that any changes to your taxable income should result in an amended tax code being issued, this is not always the case. HMRC will calculate a tax code but may not always issue it to you or your employer or pension provider. Don’t assume that because your circumstances have changed everyone has been notified of a corrected tax coding.

You should also be aware that your employer or pension provider will not receive a copy of your P6 tax code notification; they will only receive an updated tax code, so will not know if this is based on the correct information.

Emergency tax codes

An emergency tax code can be applied if, for example, you have started a second or new job. It will end with either a W1 (weekly pay) or M1 (monthly pay) letter, such as 1250M1.

These tax codes are meant to be temporary. If, after one month, either of these codes still shows on your payslips, check it out because your tax code may be wrong, and this could lead to you overpaying or underpaying tax by the year end.

EStimated income, expenses and benefits

Where you have previously claimed employment expenses, such as professional fees, subscription costs, or business mileage, it is common practice for HMRC to estimate these for the following year(s). It therefore makes sense to notify HMRC that employment expenses have changed or ceased, otherwise you may have to rectify an underpayment of tax or you may not be reimbursed automatically for tax you have overpaid.

It’s worth bearing in mind that HMRC’s systems may estimate additional income during the year which can affect your tax code. If you are in receipt of a company car benefit and you change or dispose of the vehicle, your employer will need to inform HMRC using a P46 (car) form.

 

Other taxable income

If you receive additional taxable income of less than £3,000, perhaps earnings from self-employment, under certain circumstances you can ask HMRC to have this amount paid through your tax code for the following tax year. Whilst this will not reduce your overall tax liability, it means that rather than having to pay the amount in one lump sum, you can pay it interest free over the following 12 months.

To do this you must ensure your Self-Assessment paper return is submitted by October 31 or your online Self-Assessment return is received by December 31.

There are exceptions when this is not possible:

  • you do not have enough PAYE income for HMRC to collect it
  • you would pay more than 50% of your PAYE income in tax
  • you would pay more than twice as much tax as usual

What if I think my tax code is wrong?

If your tax code is incorrect you could end up having to find extra money, that you have not budgeted for, to settle a tax bill or you might need to put in a claim for tax to be reimbursed.

 

If in doubt, don’t ignore it. Discuss your concerns with your accountant or adviser. Alternatively, get in touch with HMRC direct by calling 0300 200 3300 or signing in via your online personal tax account. You can set up an account at https://www.gov.uk/personal-tax-account

Tax Code Letters                              What they mean

 

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 been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code

 

BR                   All your income from this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension)

 

D0                   All your income from this job or pension is taxed at the higher rate (usually used if you’ve got more than one job or pension)

 

D1                   All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension)

 

NT                   You’re not paying any tax on this income

 

S                      Your income or pension is taxed using the rates in Scotland

 

S0T                 Your Personal Allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code

 

SBR                All your income from this job or pension is taxed at the basic rate in Scotland (usually used if you’ve got more than one job or pension

 

SD0                 All your income from this job or pension is taxed at the intermediate rate in Scotland (usually used if you’ve got more than one job or pension)

 

SD1                 All your income from this job or pension is taxed at the higher rate in Scotland (usually used if you’ve got more than one job or pension)

 

SD2                 All your income from this job or pension is taxed at the top rate in Scotland (usually used if you’ve got more than one job or pension)

 

C                     Your income or pension is taxed using the rates in Wales

 

C0T                 Your Personal Allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code 

 

CBR                Your income from this job or pension is taxed at the basic rate in Wales (usually used if you’ve got more than one All job or pension) 

 

CD0                 All your income from this job or pension is taxed at the higher rate in Wales (usually used if you’ve got more than one job or pension) 

 

CD1                 All your income from this job or pension is taxed at the additional rate in Wales (usually used if you’ve got more than one job or pension)

 

W1/M1            Emergency tax code

 

K                      Tax codes with ‘K’ at the beginning mean you have income that is not being       taxed another way and it’s worth more than your tax-free allowance