Tax Codes Explained: Why Yours Might Be Wrong (And How To Fix It)
Understanding your tax code might not be the most exciting part of managing your finances, but it’s one of the most important. Your tax code affects how much income tax you pay through PAYE, and if it's incorrect, you could either be paying too much tax or leave yourself vulnerable to a nasty surprise tax bill. In this article we will explain what tax codes are and how to correct them if they’re wrong.
What is a Tax Code?
Your tax code is a number and letter combination that tells HM Revenue & Customs (HMRC), your employer or pension provider how much tax-free income you are entitled to each tax year. Your employer then uses your tax code to work out how much tax to deduct from your pay under PAYE.
The standard tax code is 1257L. The number tells your employer your personal allowance is £12,570 (£12,570 divided by 10 = 1257). The letter tells your employer about the type of tax allowance you have.
- L - Standard personal allowance
- BR - All income taxed at the basic rate (often used for second jobs)
- D0 / D1 - Income taxed at the higher or additional rate
- K - Used when deductions exceed your personal allowance
- M / N - Marriage allowance adjustments
- S / C - Scottish or Welsh income tax rates
- 0T - No personal allowance
- NT - No tax payable
- W1 / M1 / X - Emergency tax codes used temporarily
Knowing what your tax code letters mean will help you quickly spot when things are wrong.
Why your Tax Code Might Be Wrong?
Wrong tax codes are fairly common. HMRC will only have the correct tax code for you if they have up-to-date information on all of your income, benefits, and circumstances. The problem is, when your circumstances change your tax code may not always be adjusted in time.
New Job
If you start a new job and your employer doesn’t have your old P45, then HMRC will issue your employer with an emergency tax code. Emergency tax codes are higher than normal and you’ll pay more tax each month until HMRC update your details.
Multiple jobs / pensions
If you have more than one job or pension, HMRC may divide your tax-free allowance between them. Or they may apply a basic rate tax code such as BR to one of your incomes. You may be paying too much tax if they don’t divide your allowance correctly.
Taxable benefits or untaxed income
Salary perks like company cars or medical benefits can affect your tax code. Renting out property or getting interest on your savings might too. If something isn’t registered with HMRC, your tax code could be wrong.
Marriage Allowance
Sharing part of your personal allowance with your spouse or civil partner changes your tax code. If yours is wrong, it may not have been applied correctly.
Annual Updates
HMRC update tax codes throughout the year. They do this to tell employers about changes to allowances, tax bands or because you paid too little tax in the previous year. Updates don’t always seem to take your current circumstances into account.
Signs Your Tax Code Might Be Incorrect
Double check your tax code if:
- Your tax code has suddenly changed
- You’re paying more or considerably less tax
- You’ve changed jobs or income recently
- You see W1, M1 or X on your payslip
Quickly spotting the signs that your tax code might be wrong can save you headaches later.
How To Check Your Tax Code
Your tax code can be found on:
- Your payslip
- Your P60 or P45
- Your HMRC Personal Tax Account online
- A tax coding notice from HMRC
It’s easy to check your tax code, so make sure you try do it at least once a year.
How Do I Fix My Tax Code?
OK, so you think your tax code is wrong. Here’s what you should do about it:
1. Check your details online
Sign into your HMRC Personal Tax Account and make sure they have the correct details for your income, benefits and employment.
2. Tell HMRC if something’s wrong
Did you spot something that’s not quite right? You can inform HMRC online and they’ll send you a new tax code.
3. Contact HMRC directly
If someone else pays your income or you’re not sure how to update your information online, contact HMRC directly and ask them to review your code.
4. Claim a tax refund
If you’ve overpaid tax, HMRC can refund you or adjust your tax code going forward.
Ask for Professional Help
Navigating the world of tax codes isn’t everyone’s idea of fun. So if you’re unsure or worried about getting it wrong, get advice from an accountant. It could save you time, stress and money.
At Phinch, we can help you check your tax code and fix it with HMRC if it’s wrong. Get in touch today and we’ll make tax simple for you.
