Is your tax code correct?
According to recent research, 45% of SMB employees across the UK have paid too much tax as a result of being on the wrong tax code or through errors with deductions. 7% of employees claim to be affected in the past year alone. Let’s take a look at how to check your own tax code and what to do if it’s incorrect.
What’s a tax code?
Your tax code is used by your employer or pension provider to work out how much Income Tax to take from your pay or pension.
HM Revenue and Customs (HMRC) will tell them which code to use to collect the right tax.
However, not everyone has a tax code. You will have one if:
- You are a full or part-time employee
- You receive a private pension
You will not have a tax code if:
- You are fully self-employed
- You are unemployed
- You ONLY receive a state pension
Why might my tax code be wrong?
There are several reasons why an error with your tax code could have happened. It may be because:
- You changed jobs midway through the tax year
- You have more than one income
- You receive employee benefits
- You have just started your first job
- You have recently retired or have more than one pension
No system is full proof, which is why it is crucial to check your tax code and ensure you are paying the correct amount of income tax.
What does my tax code mean?
Your tax code will typically start with a number and end with a letter.
1250L is the 2019/20 tax code currently used for most people who have one job or pension.
The numbers in your tax code tell your employer or pension provider how much tax-free income you get in that tax year. The first three of four digits indicate how much your personal allowance is for the tax year – you just need to add a zero.
For example, if your code is 1250L, then the first 4 digits plus a zero are 12,500 indicating that your personal tax allowance for 2019/20 is £12,500.
The letter afterwards, in this instance ‘L’, refer to your situation and how it affects your Personal Allowance.
For example, ‘L’ means that you’re entitled to the standard tax-free Personal Allowance. If you had ‘BR’ in your tax code it would mean that all your income from your job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension).
You can find a full list of the tax code letters and what they refer to on the gov.uk website here.
My tax code has ‘W1’ or ‘M1’ at the end
These are emergency tax codes. If you’re on an emergency tax code your payslip will show either:
- 1250 W1
- 1250 M1
- 1250 X
You may be put on an emergency tax code if you’ve started:
- a new job
- working for an employer after being self-employed
- getting company benefits or the State 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.
It is common for this to happen when:
- paying the 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
Get more information on these tax codes on the gov.uk website here.
How can I check my tax code?
You can check your Income Tax online to see:
- what your tax code is
- if your tax code has changed
- how your tax code is worked out
- how much tax you’re likely to pay
You may also be able to see what your current tax code is on:
- Your payslip
- Your PAYE coding notice (P2), which your employer sends to you just before the start of the new tax year.
- Your P45
- Your P60
- Pension advice slip
There is also a tax code calculator on the Money Saving Expert website here, which may be useful to check what your code potentially should be against what it is currently.
What do I do if my tax code is wrong?
If you believe that your tax code is incorrect then you can either use the online check your Income Tax service to tell HMRC about it.
If you cannot use the online service, then you can contact HMRC directly.
Any tax that you have overpaid, will be reimbursed by HMRC.
How far back can I claim an overpayment?
You can claim back up to four years of overpaid tax. For example, the deadline for claiming any overpaid tax in the tax year 2015/16 is the 5 April 2020.
What happens after your tax code is changed?
HMRC will write to you or email you to let you know that your tax code has been updated and will adjust your tax code to ensure that you pay the right amount of tax across the year.
HMRC will also tell your employer and pension provider that your tax code has changed.
If you found this information useful, you may also want to check out the following:
MRA help individuals, businesses and families achieve the best quality of life they can with the resources they have. MRA specialise in corporate solutions, cash-flow analysis, life centred planning and much more.
Business Consultants based in East Sussex we service clients across the South East, Sussex and Kent, including smaller towns such as Ashford, Battle, Bexhill, Bodiam, Brighton & Hove, Cranbrook, Crowborough, Eastbourne, Hailsham, Hastings, Heathfield, Herstmonceux, Lewes, Mayfield, Newhaven, Rye, Seaford, Sevenoaks, Tenterden, Tonbridge and Tunbridge Wells.