A key element in the UK tax system is personal tax codes.
Your personal tax code allows HM Revenue & Customs (HMRC) to calculate how much tax you need to pay.
Because of the significant implication it can have on your post-tax income, it’s essential you understand tax codes and ensure that yours is correct.
What is a personal tax code?
Your personal tax code UK is a letter that helps employers and pension providers understand how much income should be deducted from your earnings or pension payments.
HMRC personal tax codes will identify your tax-free allowance. This is the amount of income you can earn before you have to start paying income tax.
The code may include letters and numbers, with each element having a specific significance in the calculation of your tax liability.
Why is your personal tax code important?
Understanding your personal tax code is important because of the role it plays in determining your tax liability.
It is fundamental to ensuring you pay the correct amount of income tax, determines your tax code personal allowance, and as a result will influence how much tax you must pay on your earnings.
The correct tax code ensures you’re not overpaying, or indeed underpaying, taxes on your income.
The primary reasons why your personal tax code is important include:
Tax-free allowance
Your tax code identifies your tax-free allowance. This is the amount of your income that is not subject to income tax. This allowance can vary depending on individual circumstances, and the tax code will identify its amount.
Calculating deductions
Employers and pension providers use personal tax codes UK to calculate the amount of income tax they need to deduct from your earnings or pension payments. Accurate tax codes reduce the risk of an employer over-collecting, or under-collecting, income tax from your earnings.
Life changes
Tax codes are adjusted to account for any changes in your personal circumstances. This can include marriage, employment changes, or any additional sources of income. Keeping up to date with these changes is essential to avoid any errors with how income tax is calculated and applied.
Avoiding penalties
If your tax code is inaccurate, it can lead to you paying insufficient income tax. This can lead to potential penalties and interest charges which can soon add up. You may also end up paying too much tax which can be onerous to try and reclaim. Regularly reviewing your tax code and updating, if necessary, can help to prevent any issues from developing.
Tax codes explained
Here is a brief guide to the different tax codes:
ENGLAND & NORTHERN IRELAND TAX CODES
- L: This is the standard tax-free personal allowance
- M: Is the ‘married persons’ allowance and means one partner receives 10 per cent of their partner’s personal allowance
- N: You are the partner who has transferred 10 per cent of your allowance to your partner
- T: This means your tax code includes other calculations that are used to work out your personal allowance
- 0T: This means that your personal allowance has already been used. It may also signify that you’ve started a new job and the details are not yet available for your employer to give you a tax code
- BR: All of your income from your job or pension is taxed at the basic rate
- D0: Your income from your job or pension is taxed at the higher rate
- D1: Your income from your job or pension is taxed at an additional rate.
- NT: If this is your code then you are not liable to pay tax on this particular income
SCOTLAND TAX CODES
- S: This indicates someone who is taxed according to current Scottish tax rates
- S0T: This indicates that your personal allowance has been used up, or you’ve started a new job and your employer does not yet have the information required to issue a tax code
- SBR: All of your income from your job or pension is taxed at the current Scottish basic rate
- SD0: All of your income from your job or pension is subject to the intermediate Scottish tax rate
- SD1: This tax code indicates that your income from your job or pension is subject to the higher rate for Scotland
- SD2: All of your income from your job or pension is taxed at the Scottish top rate
WALES TAX CODES
- C: This indicates someone who is taxed according to current Welsh tax rates
- C0T: This indicates that your personal allowance has been used up, or you’ve started a new job and your employer does not yet have the information required to issue a tax code
- CBR: All of your income from your job or pension is taxed at the current Welsh basic rate
- CD0: All of your income from your job or pension is subject to the higher Welsh tax rate
- CD1: This tax code indicates that all of your job or pension is subject to the additional rate for Wales
OTHER LETTERS
If your tax code has W1, M1 or X at the end, it indicates that you are currently on an emergency tax code.
This means that HMRC may not yet have all of your current income details, usually after you have changed jobs, or have moved from self-employment to employment.
It can also occur when you’re receiving State Pension or company benefits.
How do I know if I have the right tax code?
To ensure accurate tax calculations and prevent potential issues from arising it’s essential you are on the correct tax code.
HMRC issue a Coding Notice at the beginning of the tax year providing details of your tax code and allowance.
Your P60 or P45 will display your tax code, and this should be verified against the one issued on your Coding Notice.
HMRC provides online services that allow you to check your tax code, update your information, and view any adjustments made by HMRC.
If there are any changes in your circumstances, like a change in employment, personal life, or additional income, HMRC should be notified promptly.
Comprehensive tax advice and Planning from Digital Accounting & Finance
If you are unsure about your tax code or find discrepancies, it can be helpful to receive advice from professionals.
At Digital Accounting & Finance (DAAFL), our experts can provide comprehensive personal tax advice and planning services to help you boost your income.
Our highly experienced team of specialists enables you to take advantage of any allowances, develop tax efficiency, and take the hassle out of tax planning.
Contact us for further advice on maximising your tax allowances and ensuring tax efficiency.