Martin Lewis explains ‘complex’ tax codes
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Taxpayers are told often to check their tax codes regularly to make sure they are paying the right amount, as they could be overpaying without realising, or underpaying. This could potentially mean owing Her Majesty’s Revenue and Customs (HMRC) thousands in tax if they are not careful. According to the consumer group Which?, a basic-rate taxpayer given an emergency tax code that excludes their personal allowance could pay an extra £2,514 in tax in the 2022-23 tax year. A person’s tax code is used by their employer or pension provider to work out how much to take from their pay or pension.
There are various codes depending on how much a person earns and their situation, which will be included on a person’s payslip.
HMRC have been known to change tax codes for a number of different reasons. The tax man may switch a person over to an emergency tax code if they change jobs.
It may also change if a person begins PAYE working after being self-employed, if they get company benefits like a car or a state pension.
To do this, a person can use the “check your income tax” online service with their personal tax account on Gov.co.uk. Users will need to create a Government Gateway account to access the online service.
By using this, a person can see their current tax code, as well as that of the previous year, and for the next tax year.
Personal tax codes are also found on a person’s payslip, on their P45 if they have recently left a job, on their P60 at the end of a tax year, or in a tax code letter from HMRC.
A tax code is simply a series of numbers and letters such as 1257L, S1257L, C1257L, BR, and K497.
The most common tax code in the UK is 1257L, as it is used for most people with one PAYE job and no untaxed income, unpaid tax, or taxable benefits.
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The numbers represent how much you earn tax free, which is just the personal allowance that is set as £12,570.
The letters relate to a taxpayer’s situation and how it alters the personal allowance. Tax codes start with an “S” in Scotland and a “C” in Wales.
The following letters in a tax code all signify different things:
L – Basic personal allowance for someone born after April 5, 1948
0T – No personal allowance
BR – All income from this source is taxed at the basic rate
DO – All income from this source is taxed at the higher rate
D1 – All income from this source is taxed at the additional rate
K – Total deductions exceed their allowances
M – Marriage Allowance receiving 10 percent of their spouse or civil partners’ personal allowance
N – Marriage Allowance providing 10 percent of their unused personal allowance to their spouse or civil partner
NT – No tax is due on this income
C – Paying income tax in Wales
S – Paying Scottish rate of Income Tax in Scotland
T – Tax office needs to review the tax code or to keep personal details confidential
W1 or M1 – Emergency tax codes for week one or month one depending on when a person gets paid.
If a taxpayer believes that their tax bill is wrong, a person can update their employment details online or they can notify HMRC about the changes to their income.
HMRC will then contact the employer and if tax has been overpaid, then it will be refunded in the next payslip.
Taxpayers are able to claim back up to four years worth of overpaid tax.
If HMRC updates a person’s tax code and they have paid too much or too little tax, the group will send out a P800 or Simple Assessment tax calculation.
The Money Saving Expert Martin Lewis urged people to check their tax codes this April after National Insurance Contributions (NICs) were increased by 1.25 percentage points.
The advice shared on his website states that “even the small changes can alter the code” so taxpayers should be checking every year, or whenever they change jobs.
The website also highlights where people can receive free tax support if their situations are a little more complex.
Taxpayers can contact TaxAid if a person earns £20,000 or less a year, Tax Help for Older People if they are aged 60 years or older, or Citizens Advice which doesn’t supply advice on tax but does, however, help with related points such as benefits.
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