Crack tax code

Crack your tax code

Trying to understand your tax code is like attempting to translate Latin. But failing to decipher the alphabet soup of letters and numbers sent by HM Revenue & Customs could leave you seriously out of pocket if the wrong amount of tax is taken from your pay or pension. The start of the new financial year on the 6th of April meant new tax codes for the 41m people in the pay as you earn (PAYE) system. These combinations of letters and numbers tell your employer or pension company how much income tax to subtract.

The scary part of this is that it is your responsibility to make sure that the tax code sent by HMRC is correct as, Chas Roy-Chowdhury Head of taxation at the Association of Chartered Certified Accountants (ACCA) has said “It’s Critical that people check their code, because HMRC don’t always get it right, and you could well get a repayment.” Here is the guide to crack your tax code.

Numbers

These show how much income you can earn before paying tax. It would be too easy to put the actual amount, so the taxman knocks off the last digit. For example, if your tax code is 1150L you can earn the standard personal tax allowance of £11,500 between April 6th 2017 and April 5th 2018 without paying any tax.

Letters

These are abbreviations that give further clues to your tax status. If BR appears beside the number, for example, it means all income from this job or pension is subject to tax, at the basic rate of 20%. You should only see this code if you have more than one source of income as it means your tax free allowance has already been used up elsewhere.

DO- The higher rate of income tax, currently 40%, will be levied on all income from this source.

D1- All income from this source will be subject to additional-rate tax, so HMRC will tax at 45% from this source.

K- This means the tax that you need to pay is higher than the personal allowance. You may, for example, still be paying tax from a previous year or owe tax on benefits such as the state pension or a company car. In this case, the numbers show the tax owed, rather than the tax-free money you can receive.

L- This is the letter most people see. Congratulations: you are entitled to the standard tax free personal allowance.

M- Refers to marriage allowance. You pay less tax because your spouse or civil partner has transferred 10% (£1,150) of their personal allowance to you. To be able to do so, they must not work or earn less than £11,500 and you must be a basic-rate taxpayer.

N– This also refers to the marriage allowance but shows you’re the one making the transfer.

NT– Any income from this source won’t be taxed at all.

OT– Your personal allowance has been used up. This also appears if you have started a new job and don’t have a P45 from your previous employer, or you have not been given your new employer the information it needs to work out how much tax you should pay.

S– You will be taxed using the rates in Scotland and part of your tax will go to the Scottish government. Since April 6th this year, the higher-rate tax threshold in Scotland has been lower than in the rest of the UK. It kicks in at £43,001 rather than £45,001.

T– Your personal allowance has been cut because your annual income is expected to be more than £100,000 at which point the personal allowance starts to go down.

M1– An emergency tax code, seen if you have recently changed jobs and are paid monthly. Your tax will be based on that month rather than the full tax year. Make sure your new employer has your P45 so the code can be updated.

W1– Another emergency code, used if you are paid weekly. Again, check your employer has your P45 for updating your code.

 

If you have any questions regarding these, contact us for further advice.

Info provided by: Sunday Times

Pic provided by: Pixabay

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