Understanding your tax code | by Steve Hunt

Tax refunds | by Steve Hunt
January 25, 2020

Understanding your tax code | by Steve Hunt

One of the main reasons why 1 out of 3 UK taxpayers pay too much tax every year, is that they are on the wrong tax code. You can find your current tax code on any recent payslip and it is used by your employer to calculate exactly how much tax to take from your pay or pension. HMRC will tell them which code to use and it typically starts with a number and ends with a letter.

 

For the 2019/20 tax year, the basic personal allowance is £12,500. This means that during 2019/20, a taxpayer will need to earn above £12,500 before they pay any income tax. For most people, their tax code in 2019/20 will be 1250L– this is the Personal Allowance they are entitled to divided by 10.

 

What do the letters mean?

Letters in your tax code refer to your situation and how it affects your Personal Allowance.

Letters What they mean
L You’re entitled to the standard tax-free Personal Allowance
M Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal Allowance
N Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner
T Your tax code includes other calculations to work out your Personal Allowance
0T 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 this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension)
D0 All your income from this job or pension is taxed at the higher rate (usually used 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
S0T 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 this job or pension is taxed at the basic rate in Scotland (usually used if you’ve got more than one job or pension)
SD0 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 higher rate in Scotland (usually used if you’ve got more than one job or pension)
SD2 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
C0T 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 this job or pension is taxed at the basic rate in Wales (usually used if you’ve got more than one job or pension)
CD0 All your income from this 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 this job or pension is taxed at the additional rate in Wales (usually used if you’ve got more than one job or pension)

 

If your tax code has a ‘K’ at the beginning

Tax codes with ‘K’ at the beginning mean you have income that is not being taxed another way and it’s worth more than your tax-free allowance.

For most people, this happens when you’re:

  • paying tax you owe from a previous year through your wages or pension
  • getting benefits you need to pay tax on – these can be state benefits or company benefits

Your employer or pension provider takes the tax due on the income that has not been taxed from your wages or pension – even if another organisation is paying the untaxed income to you.

Employers and pension providers cannot take more than half your pre-tax wages or pension when using a K tax code.

If your tax code has ‘W1’ or ‘M1’ at the end

These are emergency tax codes.

Reasons you may be on an emergency tax code:

  • If you start a new job
  • If you’re working for an employer after being self-employed
  • If you’re getting company benefits or the State Pension

Once they have the correct details for you, your employer can update your tax code. HMRC will correct it automatically after you give your employer details of your previous income or pension.

 

It is wise for people to check they are on the correct tax code, as the difference over the course of a financial year can be substantial.

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