If you are an employee or worker, you will be on a PAYE (pay as you earn) tax system, meaning tax is deducted straight from your salary – unlike the self-employed, who have to calculate and pay their own tax.
For many, this ease of use means that tax codes and deducted earning are rarely checked, which could result in over taxation.
In this blog post, we’ll cover how to find your tax code, what it means and what to do if you think you are being over taxed.
Finding Your Tax Code
An employees’ tax code can be found in a number of places, you should be able to find yours on:
Payslips from your employer – these differ from employer to employer but can usually be found in the top right of your payslip on the same row as your name.
P45 – If you’ve recently left your job your employer has to send issue you with a p45. From here, your tax code can be found in section 6 of part 1A under the title ‘tax code at leaving date’.
P60 – Your P60 is a statement issued to you at the end of every tax year – this form shows how much taxable salary you paid throughout the tax year – and how much tax was deducted from your salary. Your tax code can be found under the title ‘final tax code’
Correspondence From HMRC – In addition to documents from your employer, your tax code can be found on documents from HMRC including a ‘coding notice’ you should receive yearly to inform you of your tax codes and how they are calculated for the upcoming tax year.
In addition to the coding notice – HMRC will also inform you if your tax code is amended in any way – your coding can change more than once a year and it’s very important that you read it to ensure that there are no discrepancies being included in the calculations.
What Your Tax Code Means – Calculate Your Tax-Free Allowance
Your tax code is made up of letters and numbers which mean different things. The number in your code represents your tax-free allowance (the amount you can earn before being taxed). As a general guide, you can multiply the number by 10 to calculate your tax-free income.
For example, if we take the most common tax code 1150L – you are entitled to a tax-free allowance of £11,500. So, if you earn £9,000, none of this income would be taxable, but if you earn £12,000, £500 of this would be taxable.
Letters In Your Tax Code – What They Mean
The letters in your tax code also mean different things, the most commonly found letter include:
L: This is the tax code most people are on – it means you are entitled to a tax-free allowance of £11,500.
An L coding can also be found with people with more than one employment – where their tax code is split across these different employments.
This split can by something which the employee initiates or something that HMRC will automatically do. The automated process is started when there have been regular online HMRC uploads by two or more employers and will result in HMRC making a split based on historic employer uploads.
BR or DO: This means that all your pay from this source is at the basic (BR) or higher (DO) rate. The reason for this is because your tax-free allowance has been used up against other income – this often affects people with multiple jobs or receive income from other sources such as self-employment or rental income.
K: This means that you have income that isn’t being taxed another way that is worth more than your tax-free allowance. Typically this happens when an employee has another source of income or benefits which exceed their personal allowance.
M: This means you are receiving extra personal tax-free allowance from your partner. Alternatively, N means you are transferring your unused personal allowance to your partner.
NT: Meaning you pay no tax on this income.
W1 or M1: These are emergency tax codes, they are usually only given in situations whereby a new employer, for example, hasn’t been able to calculate your tax code before you first pay day. This often results in over taxation but will be updated automatically.
What Should I Do If I’m Being Overtaxed?
Each year, HMRC checks everyone’s PAYE accounts to see if the correct amount of income tax has been collected – they will then be able to identify if anyone has paid too much tax and issue them with a refund.
If you are being overtaxed, you should not tell your employer unless you know your employer is using an incorrect tax code. Your employer has a legal duty to use the coding that is sent to them by HMRC.
If your employer is using the most up to date coding and you still think you are being overtaxed, you must contact HMRC to find out what is included in your tax code – an employer cannot do this on your behalf; that’s why it’s so important to read through all correspondence you receive from HMRC.
The HMRC has a number of tools on their website to help you claim a tax refund back to the 2013/14 tax year.
What About National Insurance?
If you look at your payslip, in most cases you will see two types of deductions, income tax (PAYE) as we have discussed in this post and national insurance.
National Insurance is a separate tax that is deducted in order to qualify for certain benefits such as state pensions – this tax applies to employees, workers and the self-employed.
As an employee or worker, you’ll find yourself paying National Insurance contributions (NIC’s) if you’re over 16 and earning above £157 a week. There are different ‘classes’ of NIC’s dependent on your employment status and earnings.
Need A Hand?
Tax codes can be confusing for both employers and employees if you are a business employing staff or about to start – you should ensure your payroll software is suitable for the size of your business and is both auto enrolment and HMRC compliant. For more information on any aspect of tax codes or payroll, give one of our expert team a call on 0117 3790810.
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This post was written by Megan Webb