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Tax codes are issued by HM Revenue and Customs (HMRC) and used by employers and pension companies to deduct income tax due. Provided that HMRC has all the information it needs when it issues a tax code, the right amount of tax should be deducted over the course of the tax year. However, if your tax code is wrong, you may be paying too much, or too little tax. It is therefore important to understand your tax code, ensure it is correct, and to rectify things if not.
How is your tax code calculated?
Tax years run from 6th April until 5th April the next year. HMRC looks at your different sources of taxable income (e.g. salary, pension, income from property, savings and investments) over a tax year and, if your total taxable income is above the personal allowance, seeks to collect income tax from you.
It is likely you will have a different tax code for each source of income. The tax code is a combination of numbers and letters. The number represents your tax free allowance. The table below explains the letters;
| Letter code | Description |
| BR | Tells your employer to deduct basic rate, 20% tax on all income |
| D0 | Tells your employer to deduct 40% tax on all income |
| D1 | Tells your employer to deduct 45% tax on all income |
| K – at the start of your tax code | Tells your employer to add this amount to your taxable pay |
| L | Tells you employer to deduct tax at the basic, higher and additional rate on the amount of taxable income once your tax-free allowance has been deducted |
| M | Means you have received a transfer of 10% of your partner’s personal allowance |
| N | Means you have transferred 10% of your personal allowance to your partner |
| NT | Means you are not paying any tax on this income |
| S – at the start of your tax code | Tells your employer to deduct tax based on the tax bands applicable in Scotland |
| T | Your tax code includes other calculations to work out your personal allowance; for example, this could be because your estimated annual income is more than £100,000 |
| 0T | Your personal allowance has been used up, or you’ve started a new job and your new employer didn’t have the details to give you a tax code |
| W1 or M1 | You are being taxed on an ‘emergency’ basis e.g. while your employer obtains details of your earnings and tax from a previous job |
In the simplest case, an individual will have a tax code based around the full tax-free personal allowance of £12,500 (2019/20). HMRC knocks off the final digit and adds a letter code to give information about how much tax to deduct. The most common tax code in 2019/20 will be 1250L. The letter L tells the employer to charge tax at the basic, higher or additional rate depending on an individual’s income. If everyone’s tax affairs were straightforward, everyone would have a tax code of 1250L and everyone would pay the right amount of tax each year without the need for end-year adjustments, filling in tax returns etc. However, life is rarely that simple.
Checking your tax code
Usually, you can find your tax code on your payslip or ‘notice of coding’ issued by HMRC. If you have registered with HMRC for an online tax account, you should also be able to see your tax coding notice online.
HMRC offers an online service you can use to check if you are paying the correct amount of tax (you will need to sign up for a ‘Government Gateway’ account to be able to use this service). It can be found at: https://www.gov.uk/check-income-tax-current-year https://www.gov.uk/check-income-tax-current-year
For people with higher incomes or more complex tax situations, it is advisable to seek expert help from a financial adviser or accountant.
For further information or to arrange an initial no-obligation consultation at our offices or another mutually convenient location, please telephone us on 01772 729 742, or alternatively, simply fill out our online enquiry form and we will give you a call to discuss your requirements.
