Understand your tax code and check if it is correct

19th September 2018 Tax Nicola Roby

Your tax code is used by your employer or pension provider to work out how much Income Tax to take from your pay or pension. HM Revenue and Customs (HMRC) will tell them which code to use to collect the correct tax. Nicola Roby at CHW Small Business Accountants in Bolton gives a brief overview.

Your tax code will normally start with a number and end with a letter and for the tax year 2018/19 the most common tax code for people who have one job or pension is 1185L.

How is the tax code worked out?

In order to work out your tax code, HMRC looks at number of things:

• Your tax-free Personal Allowance

The standard Personal Allowance is currently £11,850 per year, which is the amount of income you don’t have to pay tax on. However, there are some circumstances where your allowance may be more, for example if you claim Marriage Allowance or Blind Person’s Allowance. It is smaller if your income is over £100,000.

• Income that you haven’t paid tax on

For example, untaxed interest or earnings from a part-time job and the value of any benefits from your job for example, a company car, are added up.

• The income that you haven’t paid tax on is then deducted from your Personal Allowance.

What’s left is the tax-free income you’re allowed in a tax year and the last digit in the tax-free income amount is removed.

• A letter is then added

Letters in your tax code refer to your situation and how it affects your Personal Allowance.

The most common examples are:

L              You’re entitled to the standard tax-free Personal Allowance

M            Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal 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, for example it’s been reduced because your estimated annual income is more than £100,000

What is an emergency tax code?

If your payslip shows 1185W1, 1185M1 or 1185X you are on an emergency code which means you’ll pay tax on all your income above the basic Personal Allowance.

You may be put on an emergency tax code if you’ve started a new job, begun working for an employer after being self-employed or started getting company benefits or the State Pension.

Emergency tax codes are temporary and your employer can help you update your tax code.

What if my tax code has a K at the beginning?

Tax codes with ‘K’ at the beginning mean you have income that isn’t being taxed another way and it’s worth more than your tax-free allowance.

For most people, this happens when they are paying tax owed from a previous year through their wages or pension or receiving benefits they need to pay tax on, such as state benefits or company benefits.

In this scenario the employer or pension provider takes the tax due on the income that hasn’t been taxed from wages or pension – even if another organisation is paying the untaxed income to you.

Employers and pension providers can’t take more than half your pre-tax wages or pension when using a K tax code.

Nicola says ‘Put simply, the numbers in the code determine how much tax-free income a person will receive. For example, a person who earns £14,000 a year will receive £11,850 of their income tax free and therefore pay tax on the remaining £2,150.

‘In many instances though things are not this straightforward and the codes can be confusing. It is advisable to contact HMRC with any queries relating to tax codes in the first instance.’

If you would like advice or to discuss this further with Nicola please contact CHW Small Business Accountants Bolton on 01204 534031 or via our contact us page.

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