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Tax Tip

What is a Tax Code? 13/04/12

If you are employed the tax is being deducted from your monthly earnings from a PAYE scheme and then it becomes the employer’s responsibility to pay them directly to the HMRC on a monthly basis. The deductions made by the employer are based on tax codes provided by HMRC to enable the correct amount to be deducted each time.

Tax codes are made up of two main elements, one indicates how much tax free allowance that you are entitled to in each tax year, where as the letters on the tax code indicates the type of allowance you receive or rate to be charged. Below is the type of tax codes used:

  • BR indicates that all your pay from this source is taxed at the basic rate (BR). This is because your allowances have already been used up against your other income ( usually second job)
  • D0 code applies if you pay tax at higher rate i.e. 40% and have more than one job or pension. For example if you earn £20k on your second job you will have to pay £8k in tax.
  • K code whereby total deductions exceed your allowances. If the untaxed income on which tax is still due is greater than your annual allowances you'll be given a K code, to ensure you pay tax on the excess.
  • L code means you are entitled to some or all of the basic personal allowance for a person aged under 65
  • NT code indicates that no tax is to be deducted on your income.
  • P code means someone aged 65-74 is entitled to get the full age-related personal allowance.
  • Y code means someone aged 75 or over is entitled to get the full age-related personal allowance.
  • T code is usually used if your tax office / Inspector of Taxes need to review your tax code, usually if your tax affairs are complex.

Every year between January and March, HMRC issue new tax codes for the year ahead. However, they are not always correct, as many of the figures shown on your tax code are estimated and will vary according to your individual circumstances. There are various reasons for this, such as:

Change of job
If you are waiting for a new P45 from your previous employer the tax office may have considered your new job to be a second taxable income.

Change in state benefits
State benefits are not taxed but they can affect your tax code so any changes in benefits could see your tax free earnings entitlement change which will alter the code.

Change in company benefits.
Some company benefits such as a company car, gym membership and health insurance are taxable, so if you start receiving them it will alter your tax code.

So, always check your tax code, and notify the tax office and your accountant of any discrepancies you find. If you have overpaid you will need to claim a rebate. The tax office or your accountant will inform you of the documents you need (usually P60 and or P45 if you have changed jobs during the year). If it is during the current year, HMRC will amend the code and inform your employer and the overpaid tax will be refunded via your salary.

If you need any help and advice with your Payroll or Personal Tax returns, contact ABDS to discuss how we can help.

ABDS Chartered Certified Accountants of Southampton.Tel: 023 8083 6900 
E-mail: abds@netaccountants.net
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