Everyone is issued with a tax code by HMRC so employers can calculate and deduct the correct amount of tax from salary payments.
On the face of it tax codes are simple, but there is sometimes more to them than meets the eye. Checking that your tax code is correct each year will ensure that you pay the correct amount of tax and avoid any unexpected tax bills.
If you think your code is wrong you’ll need to let HMRC know by calling them on 0300 200 3300 or complete their online form.
Your Tax Code reflects your Personal Allowance
Everyone has a Personal Allowance which is the amount of income they can receive before tax is paid. This Personal Allowance is reflected in a tax code to tell an employer how much tax-free income someone has in that tax year.
For the 17/18 tax year most people born after 5 April 1948 will have a tax code of 1150L. This is based on their Personal Allowance of £11,500, divided by 10. The letter in the tax code provides more information to the employer so they can calculate taxes payable.
Where to find your tax code
You’ll have a tax code for each employer you have so for example, if you are only employed through your limited company, you’ll have just one tax code. If however, you have multiple employers, e.g. a second job, you’ll have a tax code for each employer. This is common for startups when the employee remains in employment whilst setting up their own company.
The tax code for a particular employer can be found on:
- payslips from that employer
- P45 from the employer if you have left that job
- P60 from the employer that they provide at the end of the tax year
- HMRC PAYE coding notice letters.
If the individual is registered for HMRC’s Self Assessment online service, the current tax code may have been published online.
Tax codes lower than the Personal Allowance
HMRC will calculate an individual’s tax-free Personal Allowance based on the current records they have. Income that tax hasn’t been paid on, unpaid tax from a previous year and, the value of any benefits from a job (e.g. a company car). The income that tax hasn’t been paid on is subtracted from the Personal Allowance and this becomes the new tax-free income allowed in the tax year. This tax-free allowance is divided by 10 to reflect it in the tax code for the year.
How a second job affects your tax code
If someone has more than one employer it is likely that each will use different tax codes.
Typically the employer for the individual’s main job will use all the individual’s Personal Allowance. In other words, the full tax code 1150L would be applied to the pay received from that employer.
In starting a second job the new employer would notify HMRC of them starting without a providing a P45 (i.e. they’ve not left their other job). In doing so HMRC instructs the new employer to apply a BR tax code. This means no Personal Allowance is allocated to that income; therefore tax will be deducted from all earnings from the second job. This is ideal if the first job pays more than the individual’s Personal allowance, however, the second job may become the main source of income.
There are typically two options:
- Leave the tax codes as they are and pay tax on all income from the second job. The downside is if the main job will not use up all the Personal Allowance for the year you’d overpay tax and then would have to wait for a tax rebate from HMRC
- Call HMRC and ask them to split the tax code between the jobs. This way the Personal Allowance is shared across both jobs
Tax code notices
The Personal Allowance is increased each tax year (6 April to 5 April) which means tax codes increase on 6 April. You can, however, receive tax code notices when your personal circumstances change too.
A tax code can also be changed during the tax year, for example, if HMRC are notified that you start or stop getting:
- income that isn’t being taxed such as from interest or rental properties
- benefits from your job that you need to pay tax on (known as Benefit In Kind), or
- State benefits such as the State Pension
Notification to HMRC commonly happens when:
- an individual files their Self Assessment Tax Return
- a form P11D to declare benefits in kind is submitted
- a new job is started and the employer notifies HMRC, or
- the individual calls HMRC to discuss a change in circumstances e.g. they no longer have a company car.
When a tax code changes HMRC will send a Notice of Coding letter to the individual to explain why and how it has been calculated. HMRC also send the new tax code to the individual’s employer or accountant electronically via RTI which then must be applied during future payroll calculations.
As of April 2017, the Scottish Parliament will have the power to independently set all income tax rates and bands applying to Scottish taxpayers. This change will apply to savings, pensions, non-dividend income and most other taxable income for the 2017/18 tax year. Personal allowance will remain the same. While the Scottish parliament has the power to set Scottish income tax rates and bands, HMRC will continue to be responsible for its collection and management. Scottish income tax is only payable by Scottish taxpayers.
HMRC will determine whether or not you are a Scottish taxpayer based on where your main place of residence is. If you are a Scottish taxpayer, your 2017/18 PAYE tax code will have the letter ‘S’ at the front.
You can find more information on the new Scottish PAYE tax codes and rates here.
What if a tax code is wrong?
A tax code is issued on the basis of the information held at HMRC at that time. If your records are not up to date, for example, if you no longer have a company car, your tax code will be wrong.
If you think your code is wrong, let HMRC know by calling them on 0300 200 3300 or completing the online form. If they agree they will adjust your tax code so you receive the correct Personal Allowance and pay the right amount of tax.
Understanding your tax code – Tax code letters and their meanings
The letter in a tax code provides more information for the employer so they can calculate how much tax to collect.
|Tax code letter||Meaning|
|L||You’re entitled to the normal tax-free Personal Allowance|
|P||Your birthday is between 6 April 1938 and 5 April 1948 and have a larger tax-free Personal Allowance|
|Y||You birthday was before 6 April 1938 and you have a larger tax-free Personal Allowance|
|T||Other calculations have been used to determine your Personal Allowance and tax code, e.g. it’s been reduced due to other untaxed income|
|0T||Your Personal Allowance has already been fully used or you started a new job and don’t have a P45|
|BR||All your income with your employer is taxed at the 20% basic rate. This is often when you have a second job or your employer is waiting for a tax code from HMRC|
|D0||All your income is taxed at the higher rate (40%)|
|D1||All your income is taxed at the additional rate of tax (45%)|
|NT||You are not paying tax on this income|
End of the tax year
At the end of the tax year employers will issue P60s to all of its employees that will summarise all of their income from that job and the tax paid.
HMRC also receive this information from each employer. They use this information to check the right amount of tax has been paid and if there have been overpayments, HMRC will issue a rebate. The tax year end process at HMRC will also resolve any issues where HMRC have issued incorrect tax codes or cases where an employer has applied an out of date or incorrect tax code for any reason.
It is slightly more complicated when someone has been a director or they have received untaxed income such as from rental property letting. In these cases the total income from all sources is assessed and reported on a Self Assessment Tax Return. This confirms to HMRC the total income for the tax year, the tax paid and if any additional tax needs to be paid by the individual or if HMRC need to make a refund.
Next steps – check your tax code is correct each year
It’s important to check that you have the right tax code for the upcoming tax year as well as the previous period. That way, you can resolve any issues quickly and pay the correct amount of tax.
- Check your P60 to ensure that the correct tax code is showing for the completed tax year’s employment
- Check your new tax code which is applied from 6 April
- Check that any Benefit In Kind notifications have been made via your P11D form
- If you suspect your tax code is incorrect, speak to HMRC and ask them to update it.