Everyone who is on a payroll or receives a private pension will have a tax code from HM Revenue & Customs (HMRC). This code also referred to as PAYE code tells your employer or pension provider what tax to deduct. But how do you understand your PAYE code?
Do you fully understand what is and is not included in your code?
You can see what tax code HMRC has issued by looking at “check your income tax” within your personal tax account. It is much easier to keep tabs on your code this way, to make sure you do not over or under pay your income tax. You can also find your tax code on your payslip.
What is the correct PAYE code?
This depends on your personal tax circumstances. Your code is made up of several numbers and a letter. For example, 1257L is the tax code currently being used for most people who are entitled to the full personal tax allowance of £12,570 (the limit up to which you pay no tax).
But this number may vary if you have other adjustments. So, let’s say for example you receive medical benefit such as BUPA worth £1,000 then your new allowance will be £11,570 generating a tax code of 1157L.
Other benefits you receive from your employer can also reduce your tax-free allowance and so change your tax code.
On the other hand, you can also receive allowances where extra tax relief is due. One example is charitable donations under gift aid. If you are making regular gift aid contributions and you are a 40% or 45% taxpayer, you will entitled to extra tax relief. This tax relief is easily obtained via amending your PAYE tax code if you are employed or in receipt of a pension.
The key therefore to getting your PAYE affairs in order and paying the correct amount of tax is to make sure you know how to understand your PAYE code.
What do the letters mean?
Letters in your tax code refer to your situation and how it affects your personal allowance.
The main letters are :
- L = you’re entitled to the tax free allowance in full
- OT = your personal allowance has been used up
- BR = tax will be paid at basic rate (20%)
- D0 = all your income will be taxed at higher rate (40%)
- D1 = all your income will be taxed at additional rate (45%)
If your code is mixed with W1 or M1 or X at the end then these are emergency codes which will be sorted once your tax affairs are established.
If you have a K code at the beginning, this means you have income that is not being taxed another way and all your allowance is used up. This is common when you are catching up on previous liabilities and when you have multiple incomes.
Let’s say you are in full employment and have income from a rental property, HMRC will try and collect the tax from your rental income through your tax code. For example, you may be making about £10,000 profit each year from your property so your tax code will be reduced to 257L. The full personal tax allowance of £12,570 less the £10,000 rental profit.
However, you do have the option of removing this extra income and paying the tax as part of your self-assessment. It is quickest and hassle free to use your personal tax account to communicate any adjustments with HMRC.
Changes in July 2022
From 6th July 2022 the threshold at which workers start to pay national insurance will rise to match with the personal tax allowance of £12,570 (currently £9,880).
National Insurance has for some time now had different thresholds to personal tax but the Chancellor decided in his Spring Statement to bring them together and deliver a tax saving of about £330 per year for a typical employee.
It is important to note the Employer’s threshold to start paying NIC has not increased but if you are employing more than one person in the business you will be entitled to Employment Allowance of £5,000.
If you want to review your / your employees pay in view of these upcoming changes please call us.
Myers Clark has a dedicated team in the payroll department who can assist you with your payroll queries and our private client team can also assist with any issues with your own or your employees tax codes. So please feel free to contact your normal manager or if you are not yet working with us please email Priya who works with new clients on priyar@myersclark.co.uk