Understanding Your Tax CodePosted: 11th of June 2015 by
Have you ever looked at your payslip? Sure, you might have looked at the amount of money you were left with after tax and national insurance, but have you ever really looked and seen what is written on there? Among the information presented on your payslip is the tax code. This is a series of numbers and letters relating to how much tax you should be paying, and why. This amount of tax you pay will differ depending on how much you have already paid over the year and is set by Her Majesty’s Revenue & Customs (HMRC). If the code is wrong you could end up paying more than you should (although you can get it back), or even owing money to the government. In order to know if you are paying the right amount, you will need to understand what those letters and numbers in your tax code mean.
The number shown in your tax code shows how much money you are allowed to earn before you pay any tax. This is known as your personal allowance. Take the number (which is the actual amount divided by 10) and add a zero to check. So, if the number is 1060, it means that you can earn £10,600 before you pay any tax that year. Most tax codes end in the letter L, so in this instance will read as ‘1060L.’
Other letters in the tax code include an M or an N. This shows marriage Allowance, whereby a couple can transfer 10% of their personal allowance to their partner. In this case the partner who is getting the extra allowance has an M, while the other will have an N rather than the usual L at the end of their tax code.
A tax code may also include a BR or the letter D followed by a number. This means that you have more than one source of income, like a second job or pension. This second salary will count against your personal allowance (in this instance £10,600). If the letters are BR it means you will be taxed at the basic rate of 20%, if it is D, it means you are paying the higher rate of 40%.
If your tax shows a K at the start it means that you are paying tax related to last year which may be more than your personal allowance. This letter can also mean that you are receiving benefits or have a company car you need to pay tax on. However, your tax can never be more than 50% of your earnings for the pay period – whether monthly or weekly.
If you have a W1 or an M1 at the end of your tax code, it means you are paying emergency tax. This may happen if you have just started a new job and your correct tax code has not been processed ahead of your first payday. This will usually be worked out over the course of the year automatically, but it is worth checking with your human resources department to make sure they are aware and have any relevant information.
You can find out more about tax codes and what to do if you have paid too much or too little tax on the HMRC website. But knowing what your payslip means is the first stage in making sure you are paying your dues, and nothing more!
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