Thousands of people across the UK are paying more tax than they need to, are you one of them? Money.co.uk explains how to check and challenge your tax code.
Introduction
It may seem like your tax code is just a random assortment of letters and numbers, but it could easily be costing you hundreds of pounds a year - if you’ve be allocated the wrong tax code you could be paying the tax man more cash than you need to.
Here’s how to check you’re on the right tax code and get it changed if you’re not.
What is a Tax Code?
Everyone who is employed, be it full- or part- time work, or who receives a private pension is assigned a tax code.
You tax code tells your employer or pension provider how much tax needs to be deducted from your gross salary before it is paid into your account.
If you’ve been assigned the wrong code you could be paying hundreds, or possibly even thousands of pounds extra in tax.
Where can You Find Your Tax Code?
Your tax code should be clearly printed on your wage slip, if you have more than one job you may have two different tax codes.
You should also be able to find your main tax code on your P60 or on your annual notification letter from HMRC.
Most tax codes are made up of a letter and two or three numbers e.g., 647L, although some codes may just have letters e.g., BR.
Why Might Your Tax Code be Wrong?
There are several situations which could result in your being assigned the wrong tax code; here are the most common:
You Change Your Job
If you have recently changed job or are still waiting for a P45 from your previous employer then you could have been given the wrong tax code. This can happen as the tax office will be unaware that you have finished you previous job so they will consider your new one a second source of income and tax you accordingly. You may also be put on an emergency tax code in this situation, until an accurate tax code is assigned.
Your State Benefits Change
State benefits aren’t taxed, however they often take up part of your Personal Allowance so can impact on your tax code. If the benefits you receive change then so could your tax-free earnings entitlement which is used to determine your tax code.
Your Company Benefits Change
Certain benefits you get from your employer, such as a company car, gym membership or health insurance, are considered taxable. If you start receiving, or have a change in any of the benefits you receive it may affect your tax code.
If any of these circumstances applies then you should make sure you check your tax code as soon as possible. However, even if you haven’t, it still makes financial sense to confirm your tax code is correct.
How to Check Your Tax Code is Right
Your tax code is determined by a number of factors including your age, health benefits, marital and employment status.
Most tax codes consist of letters and numbers; the letter will relate to your specific tax type and what type of work you are doing, while the numbers will indicate your tax-free allowance for the year.
When you check your tax code, you need to check both the letters and numbers are correct, as both affect how much tax you pay.
Here are some of the most common tax codes and what they mean:
L – The most common tax code for people who are working and entitled to the basic tax-free Personal Allowance.
P – Used for people aged from 65-74 and who are entitled to the full Personal Allowance.
Y – Used for anyone 75 or over entitled to the full Personal Allowance.
T – Usually indicates a temporary tax code issued by HMRC, while they are calculating what tax level you should pay.
K – This code indicates that the tax free benefits you receive are greater than your annual Personal Allowance. As a result you will pay the extra tax due from your benefits through your income.
Tax Codes for Second Jobs
BR – This tax code is usually used for a second job or pension rather than your main source of income and means that your whole income is being taxed at the 'basic' tax rate of 20%. When starting a new job you may be placed on this tax code if you don’t submit a P45 or P46 as the tax office may assume you have started a second job.
D0 – This also tends to apply to second jobs, but the D0 code is for anyone who falls into the higher income tax bracket. If this code appears on your pay slip, all of your income is being taxed at 40%.
NT – Stands for No Tax and indicates that no tax is being taken from your income; this may apply to full time university students who only work during the holidays or in some cases those who work abroad.
Your Personal Allowance
Once you’ve checked you are on the correct type of tax code, you’ll need to calculate your Personal Allowance: this is the amount of money you can earn each year before being taxed.
Assuming you don’t have a BR, D0 or NT code, your current tax code will include numbers relating to your annual Personal Allowance - these are usually the numbers that make up your Personal Allowance minus the final zero.
There are three annual levels of Personal Allowance, which one you’ll be eligible for is dependent on your age.
Here are the allowances for 2010/11:
- Basic - £6,475 per year when you earn less than £100,000
- Age 65-74 - £9,490 per year when you earn less than £22,900
- Age 75+ - £9,640 per year up when you earn less than £22,900
So, for example, if you have the basic Personal Allowance your tax code might read 647L.
If you earn over the limits above, or are registered blind you can check your Personal Allowance entitlement on the HMRC website.
Why is Your Tax Code Number Different to your Personal Allowance?
Your tax code can also be influenced by the benefits you receive through work, such as a company car or health insurance. You can also use the HMRC Company Car and Car Fuel Benefit Calculator for help working out how much taxable value your company car is considered to have.
How to Get Your Tax Back
If you believe that you are on the wrong tax code then you should contact your tax office to ask for a tax assessment.
If you are overpaying tax you will be able to claim a rebate. You local tax office will let you know which documents they need to process your rebate; this will usually include your P60. HMRC will also check your previous year’s contributions during your assessment, but if you think you are owed money further back than this then you can claim up to 6 years of overpayments.
Equally, if you are not paying enough tax you should inform the tax office as soon as possible: the longer you leave it the more you will have to pay back!
When you contact the tax office you will need your tax reference and National Insurance number to hand, both of which can be found on your payslip.
Get Help from an Expert
There can be little doubt that tax can be a very complicated and frustrating topic at times. However, if you’re struggling there are several places you can turn to for help:
TaxAid are a UK charity specifically dedicated to helping people resolve their tax issues, while if you are retired T.O.P. (TaxHelp for Older People) are an independent tax advice service for the elderly.
Be warned: There are several companies which offer to submit your tax rebate request on your behalf, however although you won’t have to chase HMRC yourself you will have to pay a fee which can be avoided by contacting HMRC directly.
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