What does your tax code mean? We show the most popular codes to help you calculate your tax liability and ensure your employer is calculating it correctly for PAYE.
The code is used to show what tax-free income you can receive in one complete financial year. The most basic code for the current year is 1150L which means you can earn £11,500 free of tax based on the current personal allowance. From April 2016 to 2017 the basic tax code was 1100L which means you can earn £11,000 before paying any tax.
For the 2017/18 tax year ending 5th April 2018, the standard personal tax allowance is £11,500 with a tax code of 1150L.
Historical Basic Tax Payer Codes
Each year, the amount you can earn before you pay tax has increased. Below is the recent history of changes by the Coalition and Conservative Governments.
- 2010/11 647L or £6,475
- 2011/12 747L or £7,475
- 2012/13 810L or £8,105
- 2013/14 944L or £9,440
- 2014/15 1000L or £10,000
- 2015/16 1060L or £10,600
- 2016/17 1100L or £11,000
- 2017/18 1150L or £11,500
- 2018/19 1185L or £11,850
Common Tax Codes
New tax codes get issued after a budget (Spring, Summer, 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 structure usually means you can multiply the numbers by 10 to see how much income you can earn before paying tax in 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 - 1150L for the current 2017-18 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 about your tax code.
- K - When your total allowances are less than your total 'deductions' (i.e. when you owe tax from a previous year, or your taxable benefits are greater than your personal allowances).
- V - Indicates an employee has the lower married age allowance, i.e., an employee aged 65-74.
Most of the working population will have a tax code ending in "L" and most will have 1150 in front of it giving 1150 L.
It changes for example if you're a director of a company and are claiming taxable benefits for tax purposes. The tax-free amount reduces by any benefits added to your P11D forms. Different rates and allowances apply for dividend tax that needs separate accounting and calculations. In addition to income tax, you still have to pay national insurance whether you're a salaried worker or self-employed.
Tax Code Examples
As mentioned the current code that most people receive is 1150L, but you may have other codes such as 1156L 1100L 1035L 944L 965BR or K497. These numbers are the results of calculations from the standard personal allowance less any deductions for benefits in kind. See your tax coding form for an explanation of what HMRC have deducted. The amount you get free of tax is a calculation from multiplying your code by 10.
Other Tax Codes
You may find you have a tax code of two letters and no numbers and here's the explanation for those codes:
- Code BR - You receive the Basic Rate coding when all your income gets taxed at the basic rate of tax which currently stands at 20 percent. HMRC most commonly use this code for a second job or pension receipts.
- D0 denotes when all your income gets taxed at the higher rate of tax - currently 40 or 45 percent.
- NT - The No Tax code arises when there is no tax taken from your income or pension.
How are Tax Codes Calculated?
The formula for calculating tax codes is fairly straightforward, and all calculations and assumptions made are always shown on your tax coding form you receive from the Inland Revenue each year.
Everyone starts off with his or her tax allowances with deductions made for:
- Tax underpaid in a previous year.
- Benefits in kind from form P35.
- Other income you've not paid tax on, e.g., interest received.
The resulting figure is usually positive.
Example: You have a standard personal tax allowance of £11,500, you've underpaid tax in the previous year of £400 and have benefits in kind of £500. Your new tax-free income will be £10,600, and your tax code will be 1060L.
If your deductions exceed your personal allowance and produce a negative amount, then the "K" code is used. For example, the K100 code means £1,000 gets added to your taxable income in the financial year.
Emergency Tax Codes
Normally, emergency tax codes are issued for your first job or if you move jobs and you 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 1150L 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've 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.
If your calculations show you've overpaid in the current or previous years, then you need to apply to claim tax back from HMRC.
HMRC are usually a friendly bunch of people, so just call them with any queries you have. You can find the telephone number of your local tax office on your tax coding form. Tax code changes occur in 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.