Most employees get their pay-check, make sure it’s consistent, and get on with their day.
However, there’s the risk that they could be getting underpaid, or overpaid, without knowing about it – this is down to if their tax code isn’t correct.
So, in this blog we want to explain everything there is to know about Tax Codes.
Getting Tax Codes Right
Having the wrong tax code may not seem like a huge deal, but it can frustrate your employees.
Out of nowhere the tax man can chase up these scenarios, and correct the tax code by suddenly it. This will impact the employees take home pay over the next year.
Employers can’t do much about a wrong tax code. HMRC issue tax codes, so if an employee knocks on your door, they will have to reach out to HMRC themselves in order to correct it.
Tax Codes Explained
Tax codes are used to help HMRC determine how much a person should be taxed.
Everyones gets to take home the first £12,500 of their earnings tax free in 20/21. Anything above this figure will get taxed though.
That information helps us to understand the first part of a tax code.
Tax codes are made up of a series of numbers and letters.
The number in the tax code tells the employer how much to pay the employee tax-free.
For most people in 20/21 this will be 1250 (the basic tax rate code). When you times this number by 10, you get the tax free allowance: £12,500.
Makes sense so far….
The letters tells an employer how to tax any earnings over the tax free allowance.
There are different letters that communicate different things:
L = The standard tax rate.
If the correct amount of tax was paid last year, and this job is the employees main source of income without any other work benefits: they will get the letter L.
Therefore the most common tax code is: 1250L
The Most Common Tax Codes
Sometimes the tax code can look like this:
1250L W1 or 1250L M1
They look like the common 1250L combination, but have extra letters and numbers.
These extra letters and numbers simply indicate that the employee has recently changed jobs, and have not given their P45 to their new employee.
HMRC are yet to confirm the official tax code, so this acts as a placeholder, until the information can be verified.
Another common tax code is this:
The 0T tax code is short, but simply indicates that an employee has used up all of their tax-free allowance for the year.
This means the employee will be taxed on all of their earnings. They have no tax-free allowance left.
Sometimes it is used as an emergency tax code when an employee changes employer.
Wait… The Numbers Change Too?
Sometimes the number in the tax code will be more or less than 1250. This is due to a change in the tax-free allowance the employee is entitled to.
A Number Less Than 1250
If the tax code is less than 1250 then they have less than the standard £12,500 tax allowance.
This could be due the following reasons:
- The employee receives additional employment benefits that are taxable (company car, workplace parking, private healthcare).
- They have additional income that hasn’t been taxed yet.
- Tax is yet to be paid on State benefits.
- Tax has been underpaid in previous years.
- This is a tax code for a second, or third job.
A Number More Than 1250
If the number in the tax code is more than 1250 then the employee has more than the standard £12,500 tax allowance.
This could be due to the following reasons:
- The employee buys small tools in order to do their job.
- They clean, replace or fix specialist clothing (uniform).
- The employee uses their own vehicle for business use.
- They buy fuel for a company car.
- The employee works at home regularly, so can claim some of the bills.
What Do These Letters Mean?
As we mentioned above there are also different letters that communicate different things to the employer about how much they need to tax.
Here’s a list of some you might recognise:
M = The employee receives 10% of their partner’s Personal Allowance due to Marriage Allowance.
N = The employee has given 10% of their Personal Allowance to their partner due to Marriage Allowance.
S = The letter used to calculate income or pension with the Scottish rates.
C = The letter used to calculate income or pension with the Welsh rates.
T = Other calculations have been required to work out the tax rate due to an income over £100,000.
BR = All income across multiple jobs or pensions is taxed at the basic rate.
D0 = All income across multiple jobs or pensions is taxed at the higher rate.
D1 = All income across multiple jobs or pensions is taxed at the additional rate.
NT = No tax is being paid on this income.
K = The employee has income that isn’t being taxed, and is worth more than the tax free allowance. This could be repaying tax from a previous year, or being in receipt of benefits in which tax needs to be paid.
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