It may seem like your tax code is just a random assortment of letters and numbers, but it actually plays a big role in your finances. If yours is incorrect, you could be paying a lot more cash than you need, too – and it could easily be costing you hundreds of pounds a year. Or you could just as easily be paying less – in which case you’ll have to repay anything you owe back to HMRC.
Who has a tax code?
- Employees in full-time or part-time work
- People receiving a private pension
…and who doesn’t have a tax code?
- Fully self-employed or unemployed people
- People who only receive a state pension
Why your tax code matters
Your tax code is actually used by your employer to calculate how much tax you should pay from your wages or pension before your money goes into your bank account. But, believe it or not, even the tax man gets things wrong sometimes and system errors at HMRC mean that mistakes happen from time to time. With this in mind, it’s well worth taking a few minutes to make sure you’re on the right tax code.
In this guide, we will tell you how to find out whether you’re on the right tax code – and how to get it changed if you’re not.
Where do I find my tax code?
The best place to look for your tax code is your PAYE Coding Notice (or your P2). This is sent to you and your employer in March every year, just before the tax year begins. They use this to see how much tax to deduct from your pay.
If you’re unable to find your P2, then you can have a look here…
Your payslip – whether it’s weekly or monthly, it’s listed on there
Your P45 – the form given to you by your employer when you leave your job
Your P60 – the annual summary of your salary and how much tax has been deducted
Contact HMRC – If you can’t find any of the above, just get in touch with HMRC and have your National Insurance Number to hand. Before they tell you, they’ll ask you some security questions to make sure they’re talking to the right person.
What do the different tax codes mean?
Your tax code is usually formed of numbers and a letter (for example, K497 or 117L). Each of these will determine how much tax is taken from your pay. And if you work for more than one employer (or if you work and have a pension as well), then you should have more than one code.
L – You receive the basic personal allowance
P – You’re aged 65 to 74 and receive the full personal allowance
Y – You’re 75 or over and receive the full personal allowance
V – You’re 65 to 74, and eligible for the full personal allowance, plus the married couple’s allowance, and you only pay basic rate tax
K – You either receive no tax-free pay or owe money to HMRC
T – HMRC requires further information, so they’re unable allocate a different code
BR – You’re taxed at the basic rate
DO – You’re taxed at the higher rate
NT – No tax will be taken from your income or pension
What should your tax code be?
- The first thing to do is to find your personal allowance – which just means how much you can earn before you start paying tax. Usually, this will be the current basic allowance of £11,500.
- The next thing to ask yourself is there are any deductions – meaning any income you haven’t paid tax on at source. This could be taxable employment benefits or additional income from other sources (such as renting out a property or your state pension).
- Then subtract these deductions from the total tax allowances you get (which is likely to be your basic personal allowance). The amount leftover is the total amount of tax-free income you’re allowed in a tax year.
- HMRC will take off the last digit of this number (so, that would be 1150 for the current basic personal allowance of £11,500) – and there you go. You’ve sorted the number part of your tax code.
- Finally, see which letter from the list above corresponds to your circumstances and you’ve got your full tax code.
What should you do if your code is wrong?
If you think your tax code could be wrong, it’s best to act sooner rather than later.
Get in touch with HMRC Tax Office to rectify the situation at your earliest convenience. You can reach them online – or just pick up the phone and call during opening hours to speak to a member of the team.