Understanding Your UK Tax Code: 5 Frequently Asked Questions
The UK tax code system can be confusing – what do all the letters and numbers mean and how does that affect how much tax you will have to pay?
This article will explain the different elements of the tax code that affect your tax household salary.
1) What is a tax code?
A tax code is a combination of numbers and letters that determines the amount of income tax you must pay to the Inland Revenue (HMRC).
2) How is a tax code used?
Your tax code is issued by HMRC and used by your employer or pension fund to calculate the amount of tax to withhold from your paycheck and to pay to the government.
3) How do you find your tax code?
Your tax code can be found on several different documents that you should have access to, including:
- Pay sheets
- P45 (Tax declaration of termination of employment)
- P60 (Declaration of end of tax year)
- P2 (coding notification)
- Pension notice bulletin
You can also contact HMRC online or by phone to ask them what your tax code is.
4) What do the numbers and letters mean?
The numbers in the tax code tell your employer how much of your salary is tax-exempt. For example, for tax year 2021/22 the personal allowance is £ 12,570. This means you can earn up to £ 12,570 before paying taxes. The corresponding tax code if you are a base rate taxpayer is 1257L. The numeric part of the code is the free payment amount with the last digit removed.
The letters help HMRC cope with more complicated circumstances, such as having more than one source of income, receiving a marriage allowance, or having income that has not been taxed. another way. If you have more than one job or have a job and receive a pension, each source of income will have a different tax code.
Here are some examples of common codes used:
Codes ending in BR mean that your income is taxed at the base rate (currently 20%) because your personal allowance has already been used from another income stream. Likewise, codes D0 and D1 apply to those with a second job or subsequent jobs that pay a higher rate (40%) and an additional tax rate (45%).
If you are receiving a marriage allowance which allows you to transfer 10% of your personal allowance to your spouse, then your code will end with M (if you receive part of the allowance) or N (if you give part of your allowance). allocation).
The NT code indicates that you pay no tax on this income.
Codes starting with S are Scottish tax codes and those starting with C are Welsh.
If your tax code begins with “K”, it means that you have income that is not taxed in any other way. It can be social benefits or rental income.
5) How do you verify that your tax code is correct?
If you only have one source of income and you receive your full personal allowance, then your code will be 1257L for 2021/22. However, if you have other sources of income, these jobs may attract codes BR, D0, or D1 if your personal allowance is fully used with the first job.
You can verify your code using an online checker or you can call HMRC on 0300 200 3300 or +44 135 535 9022 if you are abroad.
Advice from Blacktower Financial Management
It is your responsibility to make sure your tax code is correct, so be sure to read PAYE coding notices when you receive them and act promptly if you think your code is wrong, especially if you think you haven’t. have not paid enough taxes. If you need help with tax and investment matters, our wealth management service has a dedicated advisor at your disposal to help you plan your financial strategy to achieve your present and future goals. We will work in partnership with you to identify the best mix of investments and regularly review your position to help you get the maximum return on your investment. Contact one of our Algarve office representatives today for your free, no-obligation discussion.
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Manuela Robinson is Associate Director of Blacktower in Algarve, Portugal. We also have offices in Cascais and representation throughout Portugal.
Blacktower Financial Management has been providing specialist and localized wealth management advice in Portugal for 20 years. We can help you with expert and unbiased advice to secure your financial future. Contact us at (+351) 289 355 685 or email us at [email protected]