The UK has some very complex tax rules, and getting your head around it can be a nightmare! Knowing what taxes need to be paid and what allowances are in place can be tricky. Thankfully here at RJF accounting, we have you covered! This blog post will dig into UK tax codes, what they all mean, and the most common ones you might come across.
Blog Contents:
showWhat Is a Tax Code?
Everyone in the UK has a tax code assigned to them. It is determined by HMRC and will be sent to your employer’s payroll or your accountant if you are a company director. The only caveat to this is if you are a sole trader, as sole traders do not pay themselves via PAYE, they don’t typically have a tax code assigned to them but will still receive the tax-free allowance on their SATR.
It is a series of numbers and letters that will determine how much tax you pay on any income. A tax code shows the tax-free income an employee should receive in a single tax year, also known as their personal tax allowance. Anything earned above this amount is taxable.
Tax Codes and What They Stand For
Each tax code has a different meaning, and knowing if you are on the correct tax code could mean the difference between paying too little or too much tax, depending on your situation.
Tax Codes:
- L – You’re entitled to the standard tax-free personal allowance for that tax year.
- M – Marriage Allowance: you’ve received a transfer of 10% of your partner’s personal tax allowance.
- N – Marriage Allowance: you’ve transferred 10% of your personal allowance to your partner.
- T – Your tax code includes other calculations to work out your personal allowance.
- 0T – Your Personal Allowance has been used up, or you’ve started a new job, and your employer does not have the details they need to give you a tax code.
- BR – All your income from this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension).
- D0 – All your income from this job or pension is taxed at the higher rate (usually used if you’ve got more than one job or pension).
- D1 – All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension).
- NT – You’re not paying any tax on this income.
- K – This means you are being taxed differently from normal (usually when paying back an underpayment in tax).
- W1m M1 or X – These are emergency tax codes (non-cumlative tax codes).
The above tax codes can also include an S or a C. If they contain an S, you are being taxed under Scottish tax rules, and if they have a C, they are under Welsh tax rules.
What Are the Numbers in My Tax Code?
The numbers are the amount you can earn tax-free each tax year. For instance, the standard tax code for 2022/23 is £12,570. So the standard tax code for this year will be 1257L – meaning you are on the standard tax code (L) and can earn £12,570 before you have to pay tax on any income.
A common misconception with tax codes is that you do not pay tax until your income surpasses the tax-free amount, which is not the case. Your tax-free allowance is divided by the number of months/weeks in the year, depending on your pay schedule. So using 1257L, you would get a tax free allowance every month of £1047.50 or a weekly allowance of £241.73. Anything above these figures would be classed as taxable income; however, if your income changed and went down so long as your tax code is cumulative, it would ensure that each salary payment had the correct tax paid.
What Are Cumulative and Non Cumulative Tax Codes
If you notice an X after your tax code, this is usually a good indication that you are on an emergency tax or a non-cumulative tax code. It sounds complicated, but essentially, what that means is that you get the standard allowance, but only for that one week or month.
What does that mean?
So a cumulative tax code works for the entire year, so if you over or underpaid tax earlier in the year, your next salary payment will reflect that. If any overpayments have been made, you will get a rebate, and if any underpayments have been made, you will pay more tax.
A non-cumulative tax code only looks at that one salary payment and taxes you based on that, so if you are underpaying or overpaying, no adjustments will be made until your tax code is rectified.
If you are on a non-cumulative tax code, we would advise you to get this sorted as soon as possible, as it could land you with a tax bill at the end of the year equally, it could get you a hefty rebate, too – but it is better to be paying the correct tax from the get-go.
What to Do if You Think Your Tax Code Is Wrong
The only way to know if your tax code is incorrect is to speak to HMRC. They will look at the circumstances leading to your tax code and advise if it needs to be changed.
UK Tax Codes Summary
Your tax code will change every year or when the treasury increases the personal allowance, so don’t be surprised if it changes every April. If, however it changes halfway through the tax year, be sure to check why and make sure it is correct to save any costly over or underpayments in tax.
Here at RJF Accounting, we offer a wide range of services from VAT to payroll and everything in between. If you are struggling with your business’s tax codes and payroll, why not speak to us today?