Understanding your tax code
Tax Guide for Employees guide
As an employee, you need to understand and check your PAYE tax codes. HMRC expects you to do this. If you don’t check your tax code, you could face an unexpected tax bill, be paying too much tax now, or miss out on refunds from earlier years.
About 15% of PAYE taxpayers are likely to pay an incorrect amount of tax over the tax year. HMRC double checks the position at the end of each tax year and sends out a P800 tax calculation to any employee who appears to have paid the wrong amount of tax.
What you need to know
The standard tax codes – 1150L and BR
The standard PAYE tax code for your main job in 2017-18 is 1150L (2016/17 – 1100L). It represents £11,500 of tax-free income.
For a second or subsequent job the standard code is BR – Basic Rate, a 20% deduction. There are some circumstances in which these codes will not result in the correct deduction of tax over the tax year. This is considered in the ‘what might go wrong?’ section below.
The 1150L code is usually applied on a cumulative basis. This means that your tax position is recalculated each pay day using total pay to date and free-pay to date during the tax year. As a result, variations in income between months are averaged out. On a 1150L cumulative code, the tax you pay on your main job should be correct, so long as you earn at least £11,500 in your main job, or, if you earn less than £11,500 in the year, this is your only taxable income.
If you have a state pension
There are no standard codes for people with a state pension. Your code will be affected by any state pension you have as well as any occupational pension.
Month one and week one codes
If you start work as an employee part-way through a tax year, you may initially be put on a 1100L Week One, or 1100L Month One code. This may not be clear from your payslips or PAYE coding notice. This code will not always produce the correct answer. If you think you may be on a Week One or Month One tax code, you should ask your employer and contact HMRC. If you are still on this code at the end of the tax year, you should contact HMRC.
What might go wrong?
There are a number of circumstances in which the standard combination of 1150L code on a main job and BR code on any subsequent job may not work. These include:
1) If you earn less than £11,500 in your main job (in 2017-18) and have more than one job
Freda has two jobs. In her first job she earns £8,000, and in her second job she earns £4,000. Overall she is due to pay tax on £12,000 of income. But, the standard codes of 1150L for the main job and BR for the second job mean that she would pay too much tax during the year.
This is because she is earning less that £11,500 in her main job. The main job has £11,500 of tax-free pay allocated to it, but she can only use £8,000 of this. This means that £3,500 (£11,500 – 8,000) of her tax free pay is unused.
Freda can either wait until the end of the tax year and ask for a refund, or ask HMRC to divide her tax-free pay between jobs. If Freda decides to split the tax-free pay between jobs, then she needs to take care that the split is optimal throughout the year and to check that no mistakes are made when the codes are adjusted.
2) You have work expenses to claim as an employee
If you have incurred work expenses up to £2,500 that are not reimbursed by your employer, or you are due a standard expenses allowance, then you will have an addition to your tax code. Your code number will be higher than the standard 11500L. See the employee expenses section on left hand menu for details.
What action should I take?
For general queries, see the information on Gov.uk designed to help you check your tax code at https://www.gov.uk/tax-codes/numbers-in-your-tax-code-what-they-mean .
If this does not resolve the problem, you should phone HMRC on 0300 200 3300. Have your National Insurance number and payslip to hand.
If you have tried to resolve the position unsuccessfully with HMRC, and are on low income, you may contact the TaxAid helpline