We all have one, it is the corner stone of your pay slip, and it dictates what deductions are taken from your hard earned salary – we refer, of course, to your tax code. But do you know exactly what your tax code means, or do you simply take it for granted that it’ll do its job if left well-enough alone?
We all know that our employers are required by law to process our salary on a PAYE basis taking certain deductions such as income tax and National Insurance. Sounds simple right? It is, until you realise that every employee within a company could be required to have different deductions taken. Depending on the value you earn and your individual circumstances, there are basic rates, higher or additional rates, benefits-in-kind, etc. to be considered.
Thankfully tax codes have been devised to categorise and consolidate circumstance parameters in a way that is relatively understandable for employers, pension providers and employees alike. These codes (calculated and allocated by HMRC) essentially seek to safeguard the payroll process from errors when calculating owed income tax.
The numbers in your tax code represent the amount of personal allowance (tax free income) available to you. The most common series of numbers in 2021/22 is 1257 – reflective of the full £12,570 annual personal allowance that an individual is entitled to. This figure can change. For example, a tax code 435L would denote a personal allowance of £4,350 (435 x 10), this can happen if you owe tax from a previous tax year or you have a second job, so your allowance has been split between the two incomes.
In tax code language there are 20 letter combinations used to identify an individual’s circumstance. L is the most common suffix, this denotes an individual is entitled to the normal amount of Personal Allowance per year. If your tax code ends with D0 it generally means that you have a second job that is taxed at the higher rate. NT suffix means that there is no tax deducted (this is very rare).
We won’t attempt to list the definition of all letter suffixes here, instead we’ll deflect to the experts:
If your tax code has a K prefix, it means that the additional income needing to be taxed through the tax code is higher than the personal allowance for that year. This can occur if, for example, the taxpayer has a company car or another relatively expensive benefit as a part of their employment package.
While the prospect of this can sound scary, an employer is capped at deducting no more than 50% of your wages to cover any tax due to ensure that you still have an income to live off.
Your tax code will usually be calculated by HMRC with consideration of any tax paid or benefits-in-kind received in the previous year. Once calculated the code will be passed along to you and your employer. As you can imagine HMRC assigns millions of tax codes each year. Such is the case with any large administrative undertaking – mistakes happen, and expirations or necessary alterations can be overlooked on occasion. This is why it’s important for you to review your own personal tax code regularly.
You should be able to find your tax code on your pay slip, but gov.uk does have a dedicated checker on hand should you need it – simply visit Check your Income Tax for the current year. This service also allows you to see your personal allowance, any changes that have been made to your tax code and can estimate the amount of tax you pay that year.
If you have any questions or concerns about your current tax code we may be able to help to an extent, but in most cases you will need to contact HMRC directly should you feel any amendments are required.