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Tax Codes - The Basics

A tax code is used by your employer or pension provider to calculate the amount of tax to deduct from your pay or pension. If you have the wrong tax code you could end up paying too much or too little tax.

 

What is a tax code

A tax code is usually made up of several numbers and a letter, for example: 1060L or K497.

If your tax code is a number followed by a letter

If you multiply the number in your tax code by £10 plus £9, you'll get the approximate total amount of income you can earn in a year before paying tax.

The letter shows how the number should be adjusted following any changes to allowances announced by the Chancellor - common tax code letters are explained below.

 


Common tax code letters and what they mean
 

              

Reason for use

L

For those eligible for the basic Personal Allowance - 1060L for the 2015-16 tax year. It is also used for 'emergency' tax codes.

P

For people aged 65 to 74 and eligible for the full Personal Allowance

Y

For people aged 75 or over and eligible for the full Personal Allowance

T

 

 If there are any other items HMRC need to review in a tax code, for example the income-related reduction to the Personal Allowance.

Tax code ‘0T’ means your allowances have been used up or reduced to nil and your income is taxed at the relevant tax rates.

K

When your total allowances are less than your total 'deductions'

 

Tax codes ending in V are no longer used.

 

Other tax codes

If your tax code has two letters but no number, or is the letter 'D' followed by a number, it is normally used where 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.

Other tax codes and what they mean:

 

                   

Reason for use

BR

Is used when all your income is taxed at the basic rate - currently 20% (most commonly used for a second job or pension but may also be used if you have started a new job and don’t have a form P45.

D0

Is used when all your income is taxed at the higher rate of tax - currently 40% (most commonly used for a second job or pension).

D1

Is used when all your income is taxed at the additional rate of tax – currently 45 per cent (most commonly used for a second job or pension)

NT

Is used when no tax is to be taken from your income or pension.

 

If you have two jobs or pensions, it is likely that all of your second income will be taxed at the basic or higher rate - depending on how much you earn. This is because all of your allowances will have been used against the income from your main job or pension.

 

Marriage Allowance - New Tax Code Letters introduced from April 2015

 

From the 6th April 2015, the Marriage Allowance comes into effect which will allow a spouse or civil partner who does not pay tax, or does not pay tax above the basic rate of income tax, to transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner, as long as the recipient of the transfer does not pay more than the basic rate of income tax. This could represent a saving of up to £212 per year for eligible couples.

Eligible couples can register for the marriage allowance at www.gov.uk/marriage-allowance. There’s guidance for couples to check their eligibility for the new allowance, and registration only takes about three minutes. From April, HMRC will begin inviting those customers who have registered their interest to be among the first to apply using the new online service. Customers who choose not to register early, however, will not lose out. Instead, they will be able to make an application later in the 2015-16 tax year and still receive the full annual allowance.

To support the change, both the transferor and recipient’s tax codes will be amended. This in turn introduces two new tax code suffixes as follows:

  • M will be used for the spouse/civil partner receiving the transferred allowance
  • N will be used for the spouse/civil partner transferring the allowance

These new tax suffixes will not be used on tax codes prior to April 2015, but will be used on P6 coding notices from April and, in due course, P9 and P9X uprating notices.

 

How tax codes are worked out

Step one

Your tax allowances are added up. (In most cases this will just be your Personal Allowance and any Blind Person's Allowance. However in some cases it may include certain job expenses.)

Step two

Income you've 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've not paid any tax on (called 'deductions') is taken away from the total amount of tax allowances. The amount you are left with is the total of tax-free income you are allowed in a tax year.

Step four

Broadly speaking, to arrive at your tax code the amount of tax-free income you are left with is divided by 10 and added to the letter which fits your circumstances.

For example, the tax code 117L means:

you are entitled to the basic Personal Allowance

£1,170 must be taken away from your total taxable income and you pay tax on what's left

The tax code spreads your tax-free amount equally over the year so that you get about the same take-home pay or pension each week or month.

 

How the 'K code' works

If your deductions (untaxed income on which tax is still due) 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 received.

 

K code example

K497 means:

your untaxed income was approximately £4,970 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
(The actual calculation is more complex and of course precise - and ensures that the exactly right amount is added to your taxable income.)


If you're on an emergency tax code


Sometimes your employer or pension payer will have to use an ‘emergency’ or ‘special basis’ code until we've worked out what your tax code should be. This can happen if you start a new job and don't have a P45 for example. While you're on an emergency code you'll get the basic Personal Allowance - this may or may not be right for you, but the tax code will be reviewed and changed if necessary once we know more about your previous pay and tax. If you have paid too much tax under the emergency code, you will get a refund.

For 2015/16, the Emergency Tax Code is 1060L.

 

Changes that might affect your tax code
 

You must keep HMRC informed of any change in your circumstances, for example if:

  • you get married, form a civil partnership, or separate and either of you were born before 6 April 1935
  • you start to receive a second (or third or more) income
  • the amount of untaxed income you get increases or reduces


Failure to inform HMRC could result in paying the wrong amount of tax. If HMRC do change your tax code, you should receive a PAYE Coding Notice from your Tax Office. Keep all notice of coding letters for reference in case you have any questions or need to check you are paying the right amount of tax.

Need help? Support is available at 0345 9390019 or support@brightpay.co.uk.

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