Are you having trouble understanding your tax code? Read this guide to find out what your tax code means and what you should do if it is wrong. If you need further assistance after reading, then call HMRC (HM Revenue and Customs) on 0843 178 7329. HMRC can help you to change your tax code. They can also help you with arranging any outstanding tax payments or refunds.
Tax Codes Explained
Your tax code will tell your employer or pension provider the amount of income tax you need to pay. Tax codes start with a number and have a letter at the end. The tax code indicates your tax-free Personal Allowance and your tax rate. HMRC will calculate this and inform your employer of your tax code. An example is 1150L, which is the tax code for most people with only one source of income. This code entitles you to the standard tax-free Personal Allowance of £11,500 a year. Check your tax code online, update your details, and see how much tax you must pay this year.
|Your Personal Allowance entitlement is the standard £11,500.|
|Marriage Allowance: you have 10% of your partner’s Personal Allowance.|
|Marriage Allowance: you gave your partner 10% of your Personal Allowance.|
|You are taxed according to the tax rates in Scotland.|
|Your tax code includes other calculations, such as a reduction for an estimated income above £100,000.|
|You used up your Personal Allowance, or you started a new job and your employer can’t give you a tax code.|
|HMRC taxes all of your income at the higher rate of 40% (used if you have more than one job or pension).|
|HMRC taxes all of your income at the additional rate of 45% (used if you have more than one job or pension).|
|HMRC taxes all of your income at the basic rate of 20% (used if you have more than one job or pension).|
|You are not paying any tax on this income.|
If your tax code begins with a K, this means that you have income worth more than the tax-free allowance which isn’t being taxed any other way. This could be because you are paying previous taxes through your wages or pension, or you receive taxable state benefits or company benefits.
Tax Rates Explained
One of these letter codes will replace the last digit of your tax-free Personal Allowance amount. This will then create your tax code. You need to make sure this tax code is accurate and you are paying tax at the correct rate for your income. The basic rate means that you have to pay 20% tax on earnings from £11,501 to £45,000. Next, the higher rate means that you need to pay 40% tax on earnings between £45,001 and £150,000. Finally, the additional rate means that you must pay 45% tax if you earn more than £150,000 a year. The tax rate applies to income over your tax-free Personal Allowance amount. Your Personal Allowance will be smaller than £11,500 if your income is over £100,000. It might be bigger if you claim Blind Person’s Allowance or Marriage Allowance.
Emergency Tax Codes
You might find that your tax code has W1 or M1 at the end instead of any of the letters above. Your payslip might show 1150 W1, 1150 M1, or 1150 X. These are emergency tax codes, which are temporary. You will pay tax on all income above the basic Personal Allowance with these codes. It is likely that you will be on an emergency tax code if you start a new job. You might have begun working for an employer after previous self-employment. If you start receiving company benefits or the State Pension, your tax code might change to an emergency one temporarily. You should provide details of your previous income to your employer or HMRC (such as a P45). HMRC will then correct this and ensure that you are now on the right tax code for your circumstances.
Wrong Tax Code
If you think your tax code is wrong, it is important to check this as quickly as possible. Being on the wrong tax code means that you could be paying too much or too little tax. The sooner you resolve this, the easier it will be for you to pay back any tax you owe. You will also be able to get back any money you overpaid due to being on the wrong code. Tell HMRC about any changes to your income or benefits which will affect your tax payments. You should also contact HMRC if you make any tax relief claims, or a Marriage Allowance claim. HMRC will adjust your code so that you are paying tax correctly throughout the year. They will let you know whenever your code changes. If you had been paying the wrong amount of tax, the adjustments will show on your next payslip.