Smarter accounting

What does my tax code mean?

7 February 2015, Advocates, Charities, Companies, Employer, Musicians, Sole Traders

Why does my tax code change?

HMRC reviews your tax code, often in the autumn and early in the new year, for many people this prompts the question “What does my tax code mean?”.  The purpose of your tax code is to indicate how much of your earnings you can receive before tax is payable.  It is  normally the case that the larger the number in your tax code, the more of your earnings you can keep and the less tax you will pay.  The exception to this is a tax code starting with K – see below.

Your tax code may change due to some of the following reasons:

  • You have filled in a self-assessment return and asked for underpaid tax to be collected through your PAYE tax code.
  • You have more than one job or source of income (eg second job/ pension/ freelance earnings)
  • Annual tax free allowance change

 

Your tax code and personal allowance are linked your NI number

The National Insurance numbercard issued by the former Department of Health and Social Security to Zacarias Moussaoui (Photo credit: Wikipedia)

Decoding my tax code

The tax year for personal tax is from 6th April to 5th April.  The standard personal allowance is £10,600 in 2015-16, which means that you don’t need to pay income tax until you earn more than £10,600.  Your net tax allowances and reliefs (if you are eligible for any) are deducted from the personal allowance to arrive at your net allowance.

In most cases, your tax code will be your net allowance with the last digit replaced by L.  The most common tax code in 2015-16 is 1060L – ie the personal allowance of £10,600.  The personal allowance will increase to £10,800 for 2016/17 for most people so anyone with a tax code of 1060L at the moment will change to 1080L in April 2016.

What does my employer do with my tax code?

Your employer / pension provider will reverse the process above to work out the tax free amount in your pay.  A tax code of 1200L would indicate a tax free allowance of £12,000.  If you are paid monthly your employer will divide the allowance by 12 and pay the first £1,000 tax free each month.  HMRC notifies your employer of any change to your tax code, but if you don’t think you are on the right tax code contact HMRC or your employer to check.  Your employer does not receive the reason for any adjustment to your tax code

Why is my tax code different for different employers?

Your tax free allowance is for you as an individual and not given to each employment / source of income.  If your current employer uses the standard tax code (1060L for 2015-16) they will use up all your tax free allowance of £10,600.  If you start a second part time job, you will have no tax free allowance left and your tax code will be different to 1060L.

Special tax codes

New tax codes for Marriage Allowance

Contact Alterledger

For more information on tax returns and employment, please contact Alterledger.

 

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