A tax code is a set of numbers and letters created by HM Revenue and Customs (HMRC) and then sent to your employer and/or pension provider. Tax codes are used to determine how much income tax is paid by individuals who receive payment under the PAYE system.
PAYE stands for â€˜pay as you earnâ€™ and itâ€™s the system whereby income tax is taken directly from your salary and/or a private pension before the funds make it to your bank account.
Youâ€™ll have a tax code if youâ€™re in full- or part-time employment, and/or if you receive a private pension. You wonâ€™t have a tax code if youâ€™re unemployed, fully self-employed, or if you only receive the state pension.
Youâ€™ll have a separate tax code for each separate source of income, whether thatâ€™s a salary or a private pension. These codes may all be different.
Your first port of call should be your P2 (also known as the PAYE Coding Notice), which should be sent to you and your employer in March, just before the start of the new tax year. It should also be sent if your tax code changes in the course of a tax year. If you canâ€™t find your P2, try:
A typical tax code would be something like 1100L. The numbers are an indication of the amount you can earn in a year before income tax applies and you need to add a zero to the end to get the true figure; in this example it would be Â£11,000. Your tax-free allowance depends on your income and age, but it can also be decreased by things like employee benefits (such as health insurance, or company cars). The letter(s) in your tax code will depend on a number of factors, things such as your age, income and circumstances. Some common examples of letters in tax codes include:
Emergency tax codes are temporary measures imposed when HMRC is working out what code you should be on. Typical occasions when people are put on emergency codes are when they start a new job, they move from self-employment to employment, or they start to receive the state pension. When youâ€™re on an emergency tax code you pay tax on all your income above the basic personal allowance. Emergency tax codes include the letters:
The marriage allowance allows transfer of part of a personal allowance to a husband, wife or civil partner. This is typically done by the lower-earning partner in a relationship in order to cut the tax liability of the higher earner. There are certain restrictions and other things to consider, so if youâ€™re thinking about applying for this read more on the government website LINK https://www.gov.uk/marriage-allowance
Your answer to this is unlikely to have been â€˜yesâ€™ because working out the tax code is the preserve of HMRCâ€¦ but it doesnâ€™t hurt to check yourself! An understanding of the numbers and letters that make up the code should give you an idea of whether the code youâ€™re on fits your circumstances.
The key figure to know is your tax allowance â€“ how much you can earn before paying income tax. As discussed above, your tax allowance relates to the number found in your tax code. In many cases your tax allowance will be the same as your personal allowance â€“ up-to-date income tax rates and personal allowance figures are found on the government website LINK https://www.gov.uk/income-tax-rates/current-rates-and-allowances.
However, there are often deductions to be made from the personal allowance. Some typical deductions that are considered include:
Take these factors into account when looking at the number in your tax code. If you think the code is wrong, there are ways to challenge itâ€¦
Contacting HMRC should be your first step, something you can do online, by phone or by post. Full details on how to do this can be found on the HMRC website LINK https://www.gov.uk/government/organisations/hm-revenue-customs/contact/income-tax-enquiries-for-individuals-pensioners-and-employees If youâ€™ve overpaid or underpaid, HMRC will get in touch with details of the next steps.
Tax codes typically change every new tax year to reflect changes that have happened in the governmentâ€™s Budget. However, your own individual tax code(s) could change at other times to reflect things such as:
There are a number of places you can turn to for financial guidance and advice, from charitable and free organisations to professional financial advisers. Read more about these areas in our guide to finding and choosing financial advice LINK http://www.gocompare.com/money/financial-advice-and-guidance/
You have now mastered the basics of understanding your tax code. If you are intrested in learning more try Gov.uk† for futher information
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