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Tax codes by Advantage Accounting

 

 

 

 

 

 

 

Tax codes – what’s the deal?

As a Payroller, one of the most common questions I receive from both employers and employees is “what does my tax code mean?”

Fear not – I’m here to help! To understand your tax code, we must delve into the background of tax codes and Personal Allowances.

What is a Personal Allowance and why does it matter?

Every year in April, the Chancellor of the Exchequer sets the Personal Allowance for the year during the Annual Budget. A personal allowance is the amount an individual can earn in the year before any tax is deducted from their income. Every person in the UK, regardless of age, is entitled to a tax-free Personal Allowance.

For the 2022-2023 tax year, the standard Personal Allowance across the UK is £12,570, meaning that majority of the UK can earn up to £12,570 before paying any tax on their income.

However, personal allowances are assessed on an individual case based on personal circumstances and your personal allowance may be lower or higher than the standard.

Your Personal Allowance matters because it dictates what your tax code will be and in turn dictates how much tax you will pay on the remainder of your income.

With all the current turmoil in Government, it’s anyone’s guess what the personal allowance will be in 2023!

Can my Personal Allowance change?

Yes – and often does for some individuals!

The amount of your personal allowance can be spread over several sources of income, particularly if you have several jobs or rental income, and therefore you might have two different tax codes in two different employments.

Expenses, allowances, benefits, and additional pay are all factors that can increase or decrease your personal allowance.

If an individual earns over £100,000 in a year, their personal allowance is reduced by £1 for each £2 of earnings over the limit, until their Personal Allowance becomes £0.

What is my tax code and where can I find my tax code?

Tax codes are created by ignoring the last digit of your personal allowance. For the standard Personal Allowance of £12,570, the tax code would be 1257L – the letter at the end indicates how your tax code is used and we will discuss this further later.

For example, if your tax allowance is 1060L, your tax-free personal allowance would be £10,600.

You can find your tax code on:

Your payslips

Your P60

Your P45

Your Personal Tax Account: https://www.gov.uk/personal-tax-account

What do the letters mean and how are they used?

This is where it gets really interesting (for payrollers in any case) – ever lain awake at night and wondered what the letter means at the end of your tax code? Yes – then it is your dream come true. No – well you might find it vaguely interesting.

You can also do a fun quiz while you are reading – what does each letter in the phonetic alphabet represent – answers below

There can be 2 types of letters in a tax code: Suffixes and Prefixes.

Suffix (appear at the end of a tax code):

L: Used for a single person’s tax code and is the most common suffix in the UK.

T: T suffixes are ‘temporary’ tax codes and usually issued to individuals that have a more complicated tax code. If you have a T at the end of your tax code, HMRC require more information from you before allocating you a better-suited tax code and you should contact them to discuss.

OT: This suffix shows that your personal allowance has been used up and you are now being taxed on the entirety of your income.

BR: This indicates that all your income in that job is taxed at the basic rate – you are normally assigned this tax code if you have more than one job.

D0: This indicates that all your income is taxed at the higher rate – you are normally assigned this tax code if you have more than one job.

D1: This indicates that all your income is taxed at the additional rate. The current additional rate of tax is 45% for income over £150,000 per year.

M and N: These are very specific tax codes only assigned to married or civil partnership couples who apply for Marriage Allowance. This is where a spouse or civil partner who is a basic rate taxpayer (or is a starter/basic or intermediate taxpayer in Scotland) can transfer 10% of their own personal allowance to their partner. If you are the partner transferring 10% of your personal allowance, you will have an N suffix. If you are the one receiving 10% of your partner’s personal allowance, you would have the M suffix at the end of your tax code. This is typically done when one partner will not fully use their personal allowance and so their partner can benefit from the transfer.

Prefix:

S prefix: if you have an S at the beginning of your tax code, HMRC have identified that you are a Scottish taxpayer. This means that your main residence is in Scotland, even if your employer is based elsewhere in the UK.

C prefix: if you have a C at the beginning of your tax code, HMRC have identified that you as a Welsh taxpayer.

If there is no C or S prefix, HMRC have identified that the taxpayer resides either in England or Northern Ireland.

K prefix: This prefix reflects additional pay such as state benefits or company benefits and indicates that you are taxed on more than just your salary. It can also mean that you owe tax to HMRC from a previous year.

Answers phonetic: :L- Lima; T – Tango; O – Oscar; B – Bravo; R – Romeo; D – Delta; M – Mike; N – November; S – Sierra; C – Charlie; K – Kilo – well dome 11 out of 11!

If you receive company benefits such as private health care, the value of that benefit would be deducted from your personal allowance e.g., you have a standard tax code of 1257L and receive private health care at the value of £150, your new tax code would reflect this and become 1242L (12570-150 = £12,420).

You would only receive a K prefix on your tax code if the additional pay you receive is more than your personal allowance.

There are other Suffixes, so if you can’t see the one that is in your tax code you can view them here.

Why does your tax code change?

Your tax code can change for multiple reasons:

• A change in employment
• You receive benefits in kind – eg a company car or healthcare.
• Additional income from another job or pension
• You claimed Marriage Allowance
• Started or stopped receiving taxable state benefits (Carers Allowance, Employment and Support Allowance, Job Seeker’s Allowance, State Pension etc)
• You have paid too little or too much tax in a previous year
• Claiming expenses with tax relief

What is an ‘emergency’ tax code?

I can guarantee that almost all of you have heard the words “emergency taxed” but what does that actually mean?

‘Emergency tax codes’ are shown as W1/M1 or X. If you are being emergency taxed, then your tax code would look something like 1257L W1/M1 (W1 stands for Week 1 and M1 stands for Month 1.)

You will be assigned this tax code if you have had a change in circumstances and HMRC haven’t yet received all the necessary information needed in time for when you are next paid. These circumstances can be starting a new job, receiving a state pension or company benefits or going from self-employed to employed.

Usually, employees are taxed on a cumulative basis, where HMRC have calculated what tax they’ve already paid in the year and how much of their personal allowance they have already used. However, the emergency tax code means that you are taxed in a non-cumulative way.

Basically, on an emergency tax code, you are taxed on what you earn in that single pay period alone rather than what you’ve already earned and paid tax on throughout the year, and you are also taxed on the assumption that you would have the standard personal allowance and as if you haven’t used any of your personal allowance yet.

I know that the word emergency tax sounds scary, however, this is not something to be frightened of. Being placed on an emergency non-cumulative tax code is designed to ensure the fairest calculation for an interim period until HMRC receive all the details they need and can conduct a more accurate calculation for you.

What to do if you believe your tax code is wrong

The news you don’t want to hear – Payrollers cannot change your tax code on the payroll system unless specifically instructed by HMRC to do so. HMRC will send a ‘change of tax code’ notification which will advise us what your new tax code should be. Unfortunately, the Payroller is not told why your tax code has changed or how they have calculated the new personal allowance that forms the tax code. We will try our best to give our own insight into why it might have changed, but the truth is only HMRC will be able to give you true detail on why your tax code is what it is.

I would always recommend calling HMRC – and calling them early in the morning to have more chance of actually getting through to someone! – on 0300 200 3300 to discuss your tax code. If your tax code is recalculated by HMRC, your employer/payroll department will receive notice of this a few weeks later and will update your tax code on the payroll system.

What about tax refunds? Does that really happen?

Tax refunds often seem like a myth, much like the unicorn, however they are real! If you have paid too much tax, there are two ways HMRC will remedy this. They will either write to you and send you a cheque – which you can either cash in online or at a bank branch.

The other way you could receive a refund is directly through the payroll, and it will show up on your payslip as a negative tax figure under ‘deductions’. Your employer would pay the tax refund to you. Employers you will not be out of pocket for any tax refund due to employees as the amount would be deducted from your PAYE liability that month.

What if I paid too little tax previously and now owe HMRC?

Normally if HMRC have calculated that you’ve paid too little tax in a tax year, they will reduce your personal allowance in the following tax year so that you pay more tax going forward.

HMRC will write to you to let you know if you’ve underpaid tax.

I’d like to thank you all for taking the time to read this blog. I hope you are now all clued up on tax codes and have enjoyed reading! If you have any payroll questions or suggestions for my next blog post, please get in touch. It would be lovely to hear from you.

Author Rachael Connelly