Decoding your tax code
This article has been provided by Tax Help for Older People.
Once again it is time for you to receive your tax coding notice for the new tax year starting on the 6th of April 2023.
Just as the nights get lighter and hopefully the weather gets warmer, brown HMRC letters appear through the letter box! HMRC will be sending out tax codes throughout the spring, with most of them being issued during February and March. You will only get a notification of a 2023/24 tax code if you are going to be a taxpayer and it is different to the current year’s tax code.
This should give you plenty of time to see how they intend to collect the tax you owe in the new tax year.
Why you need to check your tax code
Tax codes apply to the income of everyone who is employed full-time or part-time, or receiving a private pension. Everyone who has PAYE income has a responsibility to check that each tax code is correct. Do not think that responsibility for getting it right rests with employers, pension providers and HMRC. Whilst they have their part to play, it is ultimately up to everyone to make sure that their tax codes are right and also working correctly. This gets slightly more complicated for people who have more than one source of taxable income. If you believe there is a mistake, you should contact HMRC immediately to have it checked and corrected if necessary.
Nowadays, coding notices are computer generated within HMRC and transmitted directly to employers’ or pension providers’ computer systems without any human intervention. This sometimes means that errors can go undetected for a whole year or even longer, so it is important that you check the details. If there is a mistake with the code and the wrong amount of tax is collected, HMRC will follow this up and you could face a tax bill after the end of the tax year. However, if you check your code and spot the error you can let HMRC know and avoid an unexpected bill later.
As we’ve said above, you will only get a notification of a 2023/24 tax code if you are going to be a taxpayer and it is different to the current year’s tax code.
For instance, everyone on a state pension with a private or works pension who will be a taxpayer will have a change to their tax code because the state pension is going to go up by 10.1%. Therefore, changing the tax code and increasing the tax that pensioners pay. If you are a taxpayer then your pension increase will have a 20% tax liability.
Checking a tax code
A tax code is a combination of numbers and letters and is used by employers and pension providers to work out how much income tax should be deducted.
Between 6th April 2023 and 5th April 2024 most people can earn £12,570 before paying tax. This is known as the Personal Allowance and it amounts to £1047.50 per month or £241.73 a week. This allowance has once again been frozen and has not gone up since the 2021/22 tax year.
On the tax code, HMRC will drop the last digit of the tax-free amount and then add on a letter. For example, in 2023/24, the most common tax code includes just the tax free Personal Allowance of £12,570, so this becomes the tax code 1257L.
Not every taxpayer will get a code of 1257L for the new tax year. There are items included in the tax code calculation that will reduce the tax-free amount and increase the amount of tax that is taken from wages or pensions.
Examples of Income that can be deducted from your code that therefore increase the tax you pay are:
- The State Pension. This is taxable but the Department for Work and Pensions (DWP), who pay it, do not operate the PAYE system. The tax due is therefore collected by reducing the tax-free amount by the total amount of state pension paid during the year.
- Contribution based Employment Support Allowance, Job Seekers Allowance and Carers Allowances are also taxable benefits that are deducted from your tax free allowance.
- The inclusion of savings interest in the code reduces the Personal Allowance so you should check the amount of the savings interest included in your tax code is correct. HMRC will be making an estimate of the interest you will receive usually based on the amount received in previous years, so if there have been changes, HMRC will not know unless you tell them.
- Benefits from your employment, such as medical insurance should be included as a deduction in your tax code and can therefore increase the tax you pay.
There are, of course, allowances that can be added to your Personal Allowance and so increase your tax code and therefore reduce your tax bill.
Examples of Allowances that can increase your Tax Code are:
- Marriage Allowance.
- Married Couples Allowance (where at least one of the couple was born before 6/4/1935).
- Blind Person’s Allowance.
- Flat rate job expenses.
These will be added to your Personal Allowance and so increase the amount of tax-free pay you can earn. If you are entitled to any of these extra allowances, please remember they have to initially be claimed as HMRC do not apply them automatically.
What do the letters mean?
The final letter in the tax code is there for HMRC or your employer (or pension provider) to refer to. The most frequently used letters are as follows:
L is the most common letter on tax codes. This means that you qualify for the normal tax free personal allowance.
M indicates that 10% of your spouse’s personal allowance has been transferred to you by the Marriage Allowance transfer
N indicates you have transferred 10% of your personal allowance to your spouse by the Marriage Allowance transfer.
T indicates allowances are split between 2 or more incomes and HMRC will review the code every year.
X indicates there may be tax issues and HMRC will review the tax paid at the end of the tax year
BR income is taxed at basic rate, of 20%
K codes apply when there are items that reduce the tax-free allowances, such as a large state pension.
This results in minus allowances. HMRC treats these minus allowances as extra income on which tax is due, and so they use a special code number, beginning with the letter K.
Example: Personal Allowance £12,570 minus State Pension £14,000 = a minus £1,430. HMRC drop the last digit and deduct 1 from the total so the tax code would be K142. K codes are designed to collect extra tax on the minus figure, but cannot take tax of more than 50% of that period’s pay (or pension).
So, while they are designed to collect the extra tax due, if the income that it is operated against is too small it might not be possible to collect all the tax due and you may still have additional tax to pay at the end of the year. If this is the case HMRC will send either a P800 tax bill or a Simple Assessment tax bill after the tax year is over.
If you think any of the items on your tax code are wrong or you have any questions about your tax codes, either contact HMRC on 0300 200 3300 or if you are over 60, you can contact Tax Help for Older People by calling the helpline on 01308 488066.
The helpline is open 9.00 am to 5.00 pm Monday to Friday. If the line is really busy, or you want to call outside office hours, then please leave a message and an adviser will call you back. You can also email us at firstname.lastname@example.org
Alternatively if you are under 60, you can contact TaxAid, on the helpline number 0345 120 3779, and again please leave a message if the line is busy. This helpline is also open 9.00 am to 5.00 pm Monday to Friday. If you would prefer to send an email enquiry, please send it to email@example.com
This article is by Tax Help for Older People Registered Charity no 1102276 (Scotland no SC045819), offering free tax advice to older people on a low income who cannot afford professional help.