When you receive your tax code in writing from HMRC it is important to check it. Alternatively, if you don’t receive a tax code you can check your Income Tax online to understand
What your tax code is
If your tax code has changed
How your tax code was worked out
How much tax you are likely to pay.
It’s also important that you tell HMRC about a change that can affect your tax code. Your tax code usually starts with a number and ends with a letter. For example, 1250L is the tax code use for most people who have one job or pension.
How are the numbers worked out?
First, HMRC work out your tax free personal allowance. Secondly they assess any income that you have not paid tax on and the value of any benefits you receive from your job such as a company car. Thirdly, the income that you have not paid tax on is deducted from your personal allowance and what is left is the tax free income you’re allowed in a tax year. Finally, the last digit in the tax free income amount is removed. E.g. 1250 if nothing is deducted i.e. you receive the full personal allowance of £12,500 or if you receive benefits to the value 1000 if you have £2500 of income that you have not paid tax on.
What do the letters mean?
L:You’re entitled to the standard tax free Personal Allowance
M: Marriage allowance: you have received a transfer of 10% of your partners personal allowance
N:Marriage allowance: you have transferred 10% of your personal allowance to your partner
T: Your tax code includes other calculations to work out your personal allowance
OT: Your Personal Allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code
BR:All your income from your job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension)
DO: All your income from your job or pension is taxed at the higher rate (usually you if you’ve got more than one job or pension)
D1: All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension)
NT: You’re not paying any tax on this income
S: Your income or pension is taxed using the rates in Scotland
SOT: Your personal allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code
SBR: All your income from your job or pension is taxed at the basic rate in Scotland (usually used if you’ve got more than one job or pension)
SDO: All your income from this job or pension is taxed at the intermediate rate in Scotland (usually used if you’ve got more than one job or pension)
SD1:All your income from this job or pension is taxed at the top rate in Scotland (usually used if you’ve got more than one job or pension)
C: Your income or pension is taxed using the rates in Wales
CO2: Your personal allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code
CBR: All your income from your job or pension is taxed at the basic rate in Wales (usually used if you’ve got more than one job or pension)
CDO: All your income from your job or pension is taxed at the higher rate in Wales (usually used if you’ve got more than one job or pension)
CD1: All your income from your job or pension is taxed at the additional rate in Wales (usually used if you’ve got more than one job or pension)
Y: You were born before 6 April 1938 and have a higher personal allowance check this
W1: An emergency tax code – this means you’ll pay tax on all of your income above the personal allowance and may be the result of you having a new job or working for an employer after being self employed or you are getting company benefits or the State Pension. This tax code is temporary, and your employer can help you update your tax code.
M1: An emergency tax code – this means you’ll pay tax on all of your income above the personal allowance and may be the result of you having a new job or working for an employer after being self-employed or you are getting company benefits or the State Pension. This tax code is temporary, and your employer can help you update your tax code.
X: An emergency tax code – this means you’ll pay tax on all of your income above the personal allowance and may be the result of you having a new job or working for an employer after being self-employed or you are getting company benefits or the State Pension. This tax code is temporary, and your employer can help you update your tax code.
K: If your tax code begins with a K at the beginning, it means that you have income that is being taxed another way and it is worth more than your tax free allowance i.e. your personal allowance is below £0 This can happen when you are paying tax you owe from a previous year through your salary or pension or if you are getting benefits that you need to pay tax on such as state benefits or company benefits.
Always check
We cannot advise you enough to check your tax code each year. HMRC often make assumptions that your situation doesn’t change year on year when in fact it can change and so should your tax code. If you end up with the wrong tax code it can be a hassle and Klarity Tax can help with this and get it fixed. Failure to get it right can mean that you are overpaying tax during the year OR more worryingly you find yourself with an unexpected tax bill.