The anatomy of a tax code
The anatomy of a tax code
When we receive our weekly or monthly income, many of us are bewildered about what our personal tax code means. The numbers and letters throw us into a state of confusion, and all we can fathom out, is that a fraction of our income has been deducted and collected by HM Revenue and Customs to pay for public services. Tax codes can be confusing at the best of times, and a number of questions surround their anatomy.
A tax code is issued by the HMRC and used by your employer or pension provider to calculate the amount of tax to deduct from your pay or pension. This is a simple guide to helping people understand tax codes a little bit more, to help you check what to look for, where to find it and what to do if you are paying too much, this is really important if you have one or more jobs to check your code is right.
Before establishing the various codes, there are two terms to distinguish and to help understand what they mean to your tax code; Personal Allowance is the amount of taxable income that you can receive tax free in the current tax year. Another is PAYE', this means pay as you earn, and is the level of earning at which tax becomes payable.
The structure of a tax code
A tax code is usually made up of several numbers and a letter for example 147L or K587. If you multiply the number in your tax code by 10, you'll get the total amount of income you can earn in a year before paying tax.
Where do you find your tax code?
There are a number of places where you can locate your tax code, one being on your P45 form when you leave a job. This is very important to give this to your new employer when your change jobs. If you do not have a P45 your employer will provide you with a P46 to fill in and sign, then a tax code will be allocated to you by your employer. HMRC will then process your P46 and were necessary revise your tax code. More importantly, if you have paid too much tax you will be entitled to a refund, alternatively if you have not paid enough tax, your tax code will be amended to collect the underpaid tax. In addition your tax code can be found on your PAYE Coding Notice' sent to you by your Tax Office. This is usually sent by post before the start of each tax year, on the other hand it may also be sent to you at another time if something has changed, for instance if you start receiving a new source of income, or a new company benefit.
There are several Common tax codes to be aware of;
L - Tax code L' is for those eligible for the basic Personal
Allowance, an example would be seen as 647L for the 2010-2011 tax
year. Also can be used for emergency tax codes
P - Tax code P' is for persons aged 65 to 75 who are eligible for
the full Personal Allowance.
V - Tax code V' is for persons aged 65 to 75 who are eligible for
the full Personal Allowance and the full married couple's
allowance, and estimated to be liable at the basic rate of tax.
Y - Tax code Y' is for persons aged 75 or over who are eligible for
the full Personal Allowance.
T - Tax code T' highlights if there is any items in your tax codes
that need to be reviewed, for example the income related
reduction to the Personal Allowance.
K - Tax code K' is for persons whose total allowances are less than
their total deductions.
How does the K code work?
The untaxed income on which tax is still due is known as deductions', and when your deductions are more than your allowances you'll be given a K code to ensure you pay tax on the excess. Whereas with other tax codes the number indicates the amount of income you can have tax free, the number in a K code multiplied by ten broadly indicates how much must be added to your taxable income to take account of the excess untaxed income you receive. For example, K497 means your untaxed income was approximately 4970 greater than your taxable income, as a result approximately 4,970 must be added to your total taxable income to ensure the right amount of tax is collected.
What is an Emergency tax code?
In some instances your employer or pension provider will have to use an emergency' or special basis' code until HRMC has worked out what your tax should be. This usually happen if you start a new job and you do not have a P45 for example. While you are on emergency code you will receive a basic Personal Allowance which may or may not be right for you. However once HMRC identifies more about your previous pay and tax, your tax code will be reviewed and changed if necessary. In addition, if you have paid too much tax under this code you will receive a refund.
Other tax codes to be aware of;
If your tax code has two letters but no number, or has the letter D' followed by a 0', it is normally used when you have two or more sources of income and all of your allowances have been applied to the tax code and income from your main job or pension.
BR - Tax code BR' is used when all your income is taxed at the basic
rate which is currently 20 per cent (this tax code is most
commonly used for a second job or pension).
D0 - Tax code D0' is used when all your income is taxed at the
higher rate of tax which is currently 40 per cent (this tax code
is most commonly used when for a second job or pension).
NT - Tax code NT' is used when no tax is to be taken from your
income or pension.
How to work out your tax code?
There are four simple steps to identify your personal tax code;
Step one; Add up your tax allowances (in many cases, personal allowance and any blind personals allowance, some cases may include certain job expenses)
Step two; Income you have not paid tax on (for example: untaxed interest or part time earnings) and any taxable employment benefits are added up.
Step three; the total amount of income you have not paid any tax on, is called deductions', subtract your deductions away from your total amount of tax allowances. The amount that you are left with is the total of tax free income you are allowed in a tax year.
Step 4; now for the creation of your tax code, divide the amount of tax free income you are left with by 10 and add the figure you are left with to the letter which fits your circumstances, as a result you are left with your tax code.
Example 217L
You are entitled to the basic personal allowance, 2,170, therefore this cash amount is to be taken away from your total taxable income and you pay tax on what is left.
Changes that might affect your tax code;
You must keep the HRMC informed of any change in your circumstances, for example, if you get married, form a civil partnership, separate, start or receive a second income or more. In the case of a change in circumstances, the amount of untaxed income you get will either increase or reduce. Always keep a note of all coding letters for reference, as if you have to question or check if you are paying the right amount of tax, you have all the necessary information at hand. If you have the wrong tax code you could end up paying too much or too little tax, hence why is so imperative to understand tax codes.
When we receive our weekly or monthly income, many of us are bewildered about what our personal tax code means. The numbers and letters throw us into a state of confusion, and all we can fathom out, is that a fraction of our income has been deducted and collected by HM Revenue and Customs to pay for public services. Tax codes can be confusing at the best of times, and a number of questions surround their anatomy.
A tax code is issued by the HMRC and used by your employer or pension provider to calculate the amount of tax to deduct from your pay or pension. This is a simple guide to helping people understand tax codes a little bit more, to help you check what to look for, where to find it and what to do if you are paying too much, this is really important if you have one or more jobs to check your code is right.
Before establishing the various codes, there are two terms to distinguish and to help understand what they mean to your tax code; Personal Allowance is the amount of taxable income that you can receive tax free in the current tax year. Another is PAYE', this means pay as you earn, and is the level of earning at which tax becomes payable.
The structure of a tax code
A tax code is usually made up of several numbers and a letter for example 147L or K587. If you multiply the number in your tax code by 10, you'll get the total amount of income you can earn in a year before paying tax.
Where do you find your tax code?
There are a number of places where you can locate your tax code, one being on your P45 form when you leave a job. This is very important to give this to your new employer when your change jobs. If you do not have a P45 your employer will provide you with a P46 to fill in and sign, then a tax code will be allocated to you by your employer. HMRC will then process your P46 and were necessary revise your tax code. More importantly, if you have paid too much tax you will be entitled to a refund, alternatively if you have not paid enough tax, your tax code will be amended to collect the underpaid tax. In addition your tax code can be found on your PAYE Coding Notice' sent to you by your Tax Office. This is usually sent by post before the start of each tax year, on the other hand it may also be sent to you at another time if something has changed, for instance if you start receiving a new source of income, or a new company benefit. A Payroll Management company can assist with tax codes.
There are several Common tax codes to be aware of;
L - Tax code L' is for those eligible for the basic Personal
Allowance, an example would be seen as 647L for the 2010-2011 tax
year. Also can be used for emergency tax codes
P - Tax code P' is for persons aged 65 to 75 who are eligible for
the full Personal Allowance.
V - Tax code V' is for persons aged 65 to 75 who are eligible for
the full Personal Allowance and the full married couple's
allowance, and estimated to be liable at the basic rate of tax.
Y - Tax code Y' is for persons aged 75 or over who are eligible for
the full Personal Allowance.
T - Tax code T' highlights if there is any items in your tax codes
that need to be reviewed, for example the income related
reduction to the Personal Allowance.
K - Tax code K' is for persons whose total allowances are less than
their total deductions.
How does the K code work?
The untaxed income on which tax is still due is known as deductions', and when your deductions are more than your allowances you'll be given a K code to ensure you pay tax on the excess. Whereas with other tax codes the number indicates the amount of income you can have tax free, the number in a K code multiplied by ten broadly indicates how much must be added to your taxable income to take account of the excess untaxed income you receive. For example, K497 means your untaxed income was approximately 4970 greater than your taxable income, as a result approximately 4,970 must be added to your total taxable income to ensure the right amount of tax is collected.
What is an Emergency tax code?
In some instances your employer or pension provider will have to use an emergency' or special basis' code until HRMC has worked out what your tax should be. This usually happen if you start a new job and you do not have a P45 for example. While you are on emergency code you will receive a basic Personal Allowance which may or may not be right for you. However once HMRC identifies more about your previous pay and tax, your tax code will be reviewed and changed if necessary. In addition, if you have paid too much tax under this code you will receive a refund. Payroll outsourcing takes care of tax codes for you.
Other tax codes to be aware of;
If your tax code has two letters but no number, or has the letter D' followed by a 0', it is normally used when you have two or more sources of income and all of your allowances have been applied to the tax code and income from your main job or pension.
BR - Tax code BR' is used when all your income is taxed at the basic
rate which is currently 20 per cent (this tax code is most
commonly used for a second job or pension).
D0 - Tax code D0' is used when all your income is taxed at the
higher rate of tax which is currently 40 per cent (this tax code
is most commonly used when for a second job or pension).
NT - Tax code NT' is used when no tax is to be taken from your
income or pension.
How to work out your tax code?
There are four simple steps to identify your personal tax code;
Step one; Add up your tax allowances (in many cases, personal allowance and any blind personals allowance, some cases may include certain job expenses)
Step two; Income you have not paid tax on (for example: untaxed interest or part time earnings) and any taxable employment benefits are added up.
Step three; the total amount of income you have not paid any tax on, is called deductions', subtract your deductions away from your total amount of tax allowances. The amount that you are left with is the total of tax free income you are allowed in a tax year.
Step 4; now for the creation of your tax code, divide the amount of tax free income you are left with by 10 and add the figure you are left with to the letter which fits your circumstances, as a result you are left with your tax code.
Example 217L
You are entitled to the basic personal allowance, 2,170, therefore this cash amount is to be taken away from your total taxable income and you pay tax on what is left.
Changes that might affect your tax code;
You must keep the HRMC informed of any change in your circumstances, for example, if you get married, form a civil partnership, separate, start or receive a second income or more. In the case of a change in circumstances, the amount of untaxed income you get will either increase or reduce. Always keep a note of all coding letters for reference, as if you have to question or check if you are paying the right amount of tax, you have all the necessary information at hand. If you have the wrong tax code you could end up paying too much or too little tax, hence why is so imperative to understand tax codes. A UK payroll bureau could help eliminate these complexities
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