How to crack your tax code (and protect your paycheck)
How to crack your tax code (and keep your salary as safe as possible) after the big upheaval at HMRC
- Every year, HMRC sends around 28 million codes to employees and pensioners
- The pandemic creates potential for complications and errors with tax codes
- Errors may appear if you have worked more than one job or changed employers
Households are being asked to check their tax codes following a number of system overhauls.
Each year, the IRS sends around 28 million codes to employees and retirees – the bulk landing around this time.
The codes calculate the tax that must be collected before you are paid.
Shake-up: Each year, the IRS sends around 28 million codes to employees and retirees, with the bulk landing around this time.
It is your duty to tell HM Revenue and Customs (HMRC) if you are liable for tax. If you don’t, you incur a penalty. And incorrect codes could cause you to pay too much or too little.
But the pandemic has created the potential for complications and errors with taxpayer codes.
If you applied for work-from-home relief but have now returned to the office, you will need to remove the tax relief from your code.
Other errors may appear if you have worked more than one job or changed employers as HMRC may not have the correct information.
And other allowances may also have changed and not appear in your tax code.
The interest on your savings can also be a problem. If your bank told HMRC how much interest they paid you and you gave them the same figure, the tax authorities may think you received double the interest.
This means your code could be adjusted for recovery tax on interest above the £1,000 personal savings allowance.
Your code is a series of numbers and letters, for example 1257L or K497.
If you put a ‘£’ sign in front of the number and a zero at the end, you will have the amount HMRC estimates you can earn a year before paying tax. For example, 1257 becomes £12,570 the personal allowance for the following tax year.
It then lists items that will increase it, such as tax-deductible business expenses, personal savings allowance or marriage allowance. The total is then reduced by items that will reduce it, such as your public pension, private healthcare, car benefits, or taxes you owe from previous years.
If, for example, you have a public pension of £9,000, you end up with a personal allowance of £3,500 (£12,500 – £9,000) and tax code 350L which is sent to your private pension fund.
It will tax all of your pension except the first £3,500.
If you don’t receive a letter and you have an online tax account at HMRC, you can access it under ‘Tax Code’. You can also find it on your payslip or P60.
You can change your tax code via your online account at gov.uk/personal-tax-account.
Or you can telephone 0300 200 3300 with your national insurance number to hand. Or write to Pay As You Earn and Self-Assessment, HM Revenue and Customs, BX9 1AS.
What do the different letters mean?
- L: You are entitled to the standard personal allowance of £12,570.
- T: Your tax code includes other calculations to calculate your personal allowance.
- M: A transfer of 10% of your partner’s personal allowance.
- N: A transfer to your partner of 10% of your personal allowance.
- M1 or W1: This is the emergency tax code, where you are taxed monthly (M) or weekly (W). You could be over or under taxed if your income changes each month or if you started a new job during the tax year.
- OT: Your personal allowance was used elsewhere against another source of income. It could also mean that your new employer doesn’t have enough information to come up with an emergency tax code.
- NT: You pay no tax on this source of income.
- BR: You pay tax at the basic rate (20%) on this source of income.
- DO: You pay the highest tax rate (40%) on your income.
- D1: You pay the highest tax rate (45%) on your income.
- C: You are taxed at the Welsh tax rate.
- S: You are taxed at the Scottish tax rate.
- K: It’s different from the other letters because it means you have one less personal allowance amount. Your code takes into account other income, taxable benefits from your employer and money you owe HMRC and you don’t have enough personal allowances to cover these.