So what does your tax code mean? We show the most popular codes to help you calculate your own tax liability and ensure your employer is calculating it correctly for PAYE.
The code is used to show what tax free income you can earn in one complete financial year. The most basic code for the current year is 647L which means you can earn £6,475 free of tax based on the current personal allowance. From April 2011 the basic tax code will be 747L which means you can earn £7,475 before paying any tax.
Common Tax Codes
New tax codes are issued after a budget (Spring and Autumn) by the Inland Revenue to each person in the UK. Understanding what your tax code means can help you ensure the tax you pay each year is the correct amount.
Most people's codes will have three numbers followed by one capital letter. This will mean you can multiply the numbers by 10 to see how much income you can earn before paying tax in the the current financial year and is useful for overall tax planning.
Here are the most common letters used and the current tax codes used:
- L - For those eligible for the basic Personal Allowance - 647L for the current 2009-10 tax year.
- P For people aged 65 to 74 and eligible for the full Personal Allowance
- Y For people aged 75 or over and eligible for the full Personal Allowance
- T - Temporary If there are any other items HMRC need to review in your tax code
- K When your total allowances are less than your total 'deductions' (ie: when you owe tax from a previous year or your taxable benefits are greater than your personal allowances)
- V - indicates that the employee is entitled to the lower married age allowance, ie an employee aged 65-74.
Most of the working population will have a tax code ending in "L" and most will have 647 in front of it giving 647 L. It changes for example if you are a director of a company and are claiming benefits for tax purposes and these will be deducted from the tax free amount.
Tax Code Examples
As mentioned the current code that most people receive is 647L but you may have other codes such as 522L 503L 543L 603L - These are simply the main personal allowance less any deductions for benefits in kind. See your tax coding form for an explanation of what HMRC have deducted.
Other Tax Codes
You may find you have a tax code of 2 letters and no numbers and here's the explanation for those codes:
- Code BR - Basic Rate is used when all your income is taxed at the basic rate - currently 20 per cent (most commonly used for a second job or pension)
- D0 is used when all your income is taxed at the higher rate of tax - currently 40 per cent (most commonly used for a second job or pension)
- NT - No Tax Is used when no tax is to be taken from your income or pension
How Tax Codes Are Calculated
The formula for calculating tax codes is fairly straight forward and the calculations made (and assumptions in some circumstances) are always shown on your tax coding form you receive from the Inland Revenue each year.
Every one starts off with their own tax allowances and deductions are made against that allowance for :
- Tax underpaid in a previous year
- Benefits in kind from form P35
- Other income you've not paid tax on, eg: interest received
The resulting figure is normally positive.
Example: You have a standard personal tax allowance of £6,475, you've underpaid tax in the previous year of £100, have benefits in kind of £200 then your tax free income will be £6,175 and your tax code will be 617L.
If your deductions exceed your personal allowance and produce a negative amount then the k code is used. So for example K100 as a code means £100 is added to your taxable income in the financial year.
Emergency Tax Codes
Normally emergency tax codes are issued on your first job or if you move employers and you don't have or your new employer doesn't have your P45 from previous employment. Your new employer needs to calculate your tax somehow so they use an emergency code.
Standard practice is to issue you with 647L the current personal allowance code.
What if I think My Code is Wrong?
The tax authorities may get your tax code wrong if your tax is complicated, if you have recently retired, if you have moved jobs or some of your taxable benefits are no longer in existence. You need to inform your local HMRC tax centre yourself or get your accountant to inform them of any changes that have occurred in your circumstances.
HMRC are generally a friendly bunch of people so just call them with any queries you have. The telephone number of your local tax office will be found on your tax coding form. Tax code changes occur at each budget and if your circumstances have changed and it's always best to check any correspondence received from the Inland Revenue.
More information on tax codes can be found on the HMRC site here