Does it matter if you don’t know exactly what is in your “Pay As You Earn” (PAYE) code? After all HM Revenue & Customs have all the information and they will issue the right code which your employer will apply. So why should you understand your PAYE code?
It is common for taxpayers to be unaware of the contents of their PAYE code, which can result in issues down the line. In some instances, this lack of understanding has led to unpaid taxes for prolonged periods, causing significant stress.
It is important to understand that you are responsible for your taxes including the PAYE code. That’s why we think you need to know what is in your tax code and how it affects you.
If you have an accountant, they will review your tax code for your self-assessment. If not, it’s best to learn the basics.
What is a PAYE code?
Your PAYE tax code is issued by HMRC when you are employed to tell your employer how much income tax to withhold through the “Pay as you earn” (PAYE) system.
Your tax code can change from time to time, based on your personal circumstances. If it does, HMRC will inform you either via the post or through your personal tax account.
For example, if your employer pays for private medical cover, this is normally included in your PAYE code as you need to pay tax on it. Each year HMRC changes the tax code once they know how much the benefit is because this varies year on year depending on the insurance company.
Typically, you should expect to receive a new tax code at the start of each tax year if you work in the UK. Most workers will have a personal allowance of £12,570 unless their income exceeds £100,000. This results in a PAYE code of 1257L, with the “L” indicating the standard tax-free personal allowance.
This basic code of 1257L is then adjusted to reflect any other income for benefits you may receive or allowances you are due.
HMRC has launched a new online tool to assist taxpayers in understanding their tax codes, following feedback from those who struggled to do so.
You can understand your tax code by visiting the new online tool here. This tool is designed to give you confidence that your tax code as calculated by HMRC is correct and relevant. But it is dependent on you giving them the correct information.
For example, if your employer has just started paying that private medical cover, only you will know about it at this point. So you’ll need to tell HMRC.
What if my tax code is wrong
If your tax code is incorrect, it is important to have it amended promptly to avoid underpayment or overpayment.
HMRC performs reconciliations and after the tax year has finished, they will write to you asking for more money in case of underpayments. In case of overpayment, you could have had the repayment earlier. So really the sooner you correct any errors in the code the better.
The best way to keep track of your PAYE and other tax affairs is via your personal tax account (PTA). It will allow you to:
- View your tax code and Personal Allowance;
- View your estimated income from any jobs and pensions and the tax you can expect to pay for the current tax year;
- Update details of your income from jobs and pensions to avoid under or over-payments;
- See if your tax code has changed;
- Tell HM Revenue and Customs (HMRC) about changes that affect your tax code;
- Update your employer or pension provider details; and
- Give you a forecast of your state pension.
If you are hesitant to operate a personal tax account, then you can call HMRC. However, be prepared to wait for a while before anybody answers.
What should I watch out for?
There are some events that should automatically lead to corrections in your tax code. The following are some of the common examples:
- When you change your job and there is a delay in form P45
- When you start to receive multiple income, e.g. a pension as well as PAYE income
- Changes in benefits you receive from your employer e.g. company car or medical insurance
- If you have had an over or underpayment of tax in the previous tax year
- Reaching state retirement age
- Receiving investment income such as interest or rental income
- Claiming for allowances like payments to charity under gift aid or making pension payments
- Beginning to earn over £100,000
If you are not familiar with taxes, it can be challenging to know what is included in your PAYE code. Our recommendation is to simply ask your employer if any item you receive from them should be included in your tax code. Don’t hesitate to clarify any doubts you may have.
It’s also important to know about the various allowances you may be eligible for, such as job-related expenses or married couples’ allowance.
These allowances are updated every tax year and can be found in the yearly tax tables. To access the current year’s tax tables, simply visit the Myers Clark website. You can also complete the diagnostic form whilst you are there if you need help.
It is hard to make sense of whether you’re making full use of all the reliefs available to you. And you don’t want to fall behind in your taxes so always seek advice early if you are not sure