Tax Codes

Tax Codes

PAYE (pay as you earn) is a system where tax is deducted directly from your earnings.

HMRC gives your employer atax codeto show how muchtax-free pay you should get each time you get paid.

The tax code will be made up of numbers (these refer to how much income you can have before you start paying tax) and a letter (that refers to your situation – please see below).

Numbers in your Tax Code:

HM Revenue & Customs works out your Personal Allowance starting with the basic 11,000 for 2016/17.

Then then deduct for any income you haven’t paid tax on e.g. untaxed interest, benefits from your job (such as a car benefit).

What is left is divided by 10 and added to a letter as below.

This process is different if you have been awarded a K code.

Letters in a Tax Code & what they mean:

L – You’re entitled to a basic tax-free Personal Allowance

M – Marriage Allowance: You’ve received a transfer of 10% of your partners Personal Allowance.

N – Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner

S – Your income or pension is taxed at the Scottish rate of Income Tax

T – Your tax code includes other calculations to work out your Personal Allowance, e.g. it’s been reduced because your income is over the amount for basic rate tax.

0T – This tax code may be used for a couple of reasons, your personal allowance has been used up or you have just started a new job and have not completed a P45/P46.

BR – All your income from this job or pension is taxed at the basic rate (20%) this may be due to having more than one job or receiving a pension.

D0 – All your income from this job or pension is taxed at the higher rate, usually used if you have 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 have got more than one job or pension.

NT – You are not paying any tax on this income.

K - Tax codes with ‘K’ at the beginning mean you have income that isn’t being taxed another way and it is worth more than your tax-free allowance. For most people, this happens when you’re:

         paying tax, you owe from a previous year through your wages or pension

         getting State benefits that you need to pay tax on (like the State Pension)

         getting benefits from work that you must pay tax on (like a company car or health insurance)

If you Tax Code has a “W1” or “M1” at the end:

W1 (week 1) or M1 (month 1) are emergency tax codes.  This means that your tax is based on what you are paid in the current pay period, not the whole tax year.

Emergency tax codes are usually updated automatically after you have given your new employer your P45.

When your Tax Code changes:

Your tax code may change if benefits from your job start of finish, income that isn’t being taxed starts (such as rental income); your start receiving State Benefits.

It may also change if you have tax from a previous year that is unpaid and collected through your tax code.

When a Revised Tax Code can be Implemented:

If your tax code changes HMRC send your employer a notice of the new code.  Only upon receipt of this can your code be adjusted in the payroll.  Your employer cannot change your tax code based on what the employee advises to be the case.

Tax codes are received electronically through the Government Gateway so until a notice is received, or a P45 provided the tax code will remain unchanged.

If you think the Tax Code is wrong:

If you believe the tax code is incorrect, please call HMRC on 0300 200 3300.  Ensure you have your NI number to hand before giving them a call.