Let’s start with the basics.
Not everybody has a tax code. I know. It’s a bit of a shock to the uninitiated. But if you’re self employed, or just receive a state pension, then no tax code for you. You just don’t need it.
So who does then?
Well, if you’re employed, or are in receipt of a private pension, then a tax code is probably winging it’s way to you.
What’s it for?
Well, it’s a mechanism used by HMRC to collect tax from your income, and donate it to the government.
Think about it for a minute. If you’re self employed, your tax is paid over by way of your Self Assessment Tax Return. You report your income to HMRC, and they very graciously allow you to pay over the tax that is due in two instalments, 31st January, and 31st July. Done and dusted.
But, if you’re employed, that can’t happen, so instead, they use your tax code to facilitate this.
I don’t understand my code
Did you know that 48% of tax payers also don’t understand their code, and the relationship between that, and the amount of tax that they pay?
But, luckily for you, because you’re reading this, you now have a handy list, to get you started.
First of all, the L code is your standard code, and means that you’re under 65, and eligible for the standard personal allowance. In most cases, this is £12500 for 2019-20, and means that you may earn the total of £12500, before you have to pay any tax. But it doesn’t end there.
You don’t stroll merrily through the year, racking up those earnings, until you hit the magic £12500 figure. No. HMRC split the allowance over 12 months, and charge a little tax each month, to keep you all up to date. After all, you wouldn’t want to be late. Would you?
So far, so good.
What about the other codes?
Indeed. Let’s take a simple look at the various codes on offer.
Ah, the dreaded K code! This shows that you have untaxed income, which is greater than the aforementioned personal allowance of £12500, and needs to be collected via PAYE. HMRC add an adjustment to your tax code, and therefore increasing the amount of tax to be collected from your paid employment or private pension. It’s a bit like your tax code being overdrawn, owing money that you haven’t earned yet.
Picture the scene in the old fashioned wages office, if you will.
Employee: ‘Which is my tax code?’
Wages clerk: ‘Ah yes Sir, I’ll just reach it down from the ceiling….’.
K codes. To be avoided at all costs.
This is a little easier. The BR code simply means that all your earnings from one employment need to be taxed at 20%, with no personal allowance band. This is very common for those with two jobs. All the ‘allowance’ of £12500 is allocated to the highest paid employment, with the second employment bobbing along behind, to mop up the extra income, and have all of the earnings taxed at 20%.
Simply means that your allowance has been used up, or you don’t have a form P45, therefore your employer doesn’t have enough information to know what your tax code should actually be.
A few more for your delectation:
M Code – You’re married, and your partner has transferred 10% of their allowance to you.
T Code -Your tax code includes other calculations to work out your personal allowance.
NT Code -You don’t pay tax on this income.
Y Code – You were born before 6 April 1938, and receive a higher personal allowance
S Code – You’re using the Scottish rate of income tax.
Who checks my tax code?
Bad news there. You do.
Despite professing to not understand, HMRC are of the opinion that it’s the responsibility of you, the tax payer, to check your code. In fairness, they’re probably a little bit busy doing other stuff. Don’t ask me what, not answering the phone is probably the top of the list….
But the good news, is that you can always log onto your Government Gateway account, and download your latest coding notice. You have got a Gateway account, haven’t you? (Cue rolling of eyeballs…..and a link to register).