If you are an employee or worker, you will be on a PAYE (pay as you earn) tax system where income tax is deducted straight from your salary via a tax coding notice issued to your employer(s) – tax codings are not applicable to self-employed workers, who must calculate and pay their own tax.
Most taxpayers who are employed by one or more employers rarely check tax codings issued by HMRC, which may lead to over or under taxation and cause confusion around what deductions are being made from their gross pay.
In this blog post, we’ll look at the core components of a payslip including the tax code and what it means, deductions that might be present on your payslip and what to do if you think you are being overtaxed or undertaxed.
Finding Your Tax Code
An employees’ tax code can be found in a number of places:
- Payslips– Payslip formats differ from employer to employer but tax codes 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 issue you with a P45. Your last tax code with this employer can be found on the P45.
- P60 – Your P60 is a statement issued to you at the end of every tax year up to 5th April – this document shows how much taxable salary you paid throughout the tax year with this employer and how much tax was deducted from your salary. Your final tax code for the tax year can be found on this document.
- Correspondence from HMRC – Your tax code may be found on correspondence from HMRC, HMRC will also inform you and your employer(s) if your tax code is revised – you should read tax coding notices carefully to ensure that no discrepancies are being included in the calculations.
- UK – GOV.UK has a free online tool that allows you to check your tax code and tell HMRC about any changes that could affect your tax code.
What Your Tax Code Means – Calculate Your Tax-Free Allowance
Your tax code is made up of letters and numbers. The number in your code represents your tax-free allowance allocated to an employer (the amount you can earn before being taxed). As a general guide, you can multiply this number by 10 to calculate your annual tax-free income allocated to this employer.
For example, if we take the most common tax code for 2021/22 1257L – you are entitled to a tax-free allowance of £12,570. So, if you earn £12,000, none of this income would be taxable, but if you earn £13,000, £430 of this would be taxable.
Letters In Your Tax Code – What They Mean
The letters in your tax code affect the way earned income is taxed each period, the most commonly found letters include:
- L:This is the most common letter in any tax coding – it means you are entitled to the standard tax-free Personal Allowance. The basic Personal Allowance for the 2021/22 financial year is £12,570.
- BR, DO or D1: This means that all your pay from this source of earnings is taxed at the basic (BR), higher (DO) or additional (D1) rate. The current basic rate of tax is 20%, the current higher rate is 40% and the current additional rate is 45%. These codes are generally used for a second job or pension.
- K: This means that you have income that isn’t being taxed another way that is worth more than your tax-free allowance. This could include company benefits, state pension, or tax owed from previous years.
- M: This means you are receiving extra personal tax-free allowance from your partner. Alternatively, N means you are transferring part of your unused personal allowance to your partner.
- W1, M1 or X: These are emergency tax codes, you may be put on an emergency tax code if you’ve started a new job, are working for an employer after being self-employed or are getting company benefits or the state pension. Emergency tax codes are usually temporary and your employer can help you update your tax code.
- T: This means that your tax code includes other calculations to work out your Personal Allowance.
- C :A prefix that indicates you are resident in Wales and your income is taxed using the rates in Wales.
What Should I Do If I Think I Have Overpaid or Underpaid Tax?
At the end of each tax year (5th April), HMRC checks all taxpayers income to see if the correct amount of income tax has been collected during the year from their tax codings – HMRC will identify taxpayers that have overpaid tax and issue them with a refund or taxpayers that have underpaid tax either issue a revised tax coding to their employer(s) for the next tax year to spread the repayment of the underpaid income tax or request repayment for underpaid income tax exceeding £3,000.
If you think your current tax code is wrong and you are paying too much tax as a result, you should contact HMRC who can explain your coding and, if necessary, will issue your employer or employers with revised tax codings.
If you believe you have overpaid tax in an earlier tax year HMRC has a number of tools on their website to help you claim a tax refund.
Deductions On Your Payslip
If you look at your payslip, alongside income tax (PAYE) you may see other deductions including National Insurance, pension contributions, attachment of earnings orders and student loan deductions.
- National Insurance – National Insurance is a separate tax that is deducted in order to qualify for certain state 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 once you earn over £184 per week. There are different ‘classes’ of NIC’s dependent on your employment status and earnings.
- Pension Contributions – If you contribute towards a workplace pension, your monthly deductions will be shown on your payslip. As auto-enrolment is mandatory for employers since 2017 the number of people contributing to a workplace pension has increased significantly and these are common payslip deductions. Find out more about workplace pensions on the GOV UK website.
- DEO Deductions – Deduction from Earnings Order (DEO) deductions are for ongoing child maintenance.
- AEO Deductions – Attachment of Earnings Order (AEO) deductions are for debts such as unpaid child maintenance or fines (a priority order) or a county court judgement (a non-priority order).
- Student Loan Deductions – If you utilised student finance to go to university, loan repayments will be shown on your payslip as deductions. The amount you pay and when you start to pay it depends on which repayment plan you are on.
Need A Hand?
Understanding payroll deductions can be confusing for both employers and employees. If you are a business currently 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 payroll, give one of our expert team a call on 0117 3790810.
- Major Payroll Changes for Businesses on Employee Holiday Entitlements - November 7, 2022
- How Will the Increase in the National Insurance Threshold Affect You? - June 30, 2022
- Preparing for the UK’s Health and Social Care Levy - February 18, 2022
This post was written by Karen