With the new tax year upon us, now is a good time to check your tax code. If you have the wrong tax code, then you could be overpaying on your tax. Equally as bad, you could be underpaying and building up a nasty unexpected tax bill when HMRC gets around to correcting your code.
So, what do you need to look for?
The first thing to check is if you are receiving the correct tax free allowance. How do you know how much allowance your tax code gives you? That’s simple, just add a zero to the end of your tax code number and that’s your allowance (or add back, if you are in the unfortunate position of having a “negative” tax code).
The standard code for the current tax year is 1257L, which indicates a tax free allowance of £12,570 per annum.
The tax free allowance can go up or down dependant on personal tax circumstances. The tax free allowance may be reduced by other income or taxable benefits received. Common taxable benefits could be private healthcare provided by your employer or car benefit if you have a company car.
Your personal tax free allowance is also reduced if your income goes above £100,000 per annum and the allowance is reduced to NIL if your income goes above £125,140 per annum.
Should you be issued with a tax code beginning with K it means you have other income that isn’t taxed any other way and that income outweighs the tax free allowance. This is what we called a “negative” tax code earlier. The amount on your tax code is added to your taxable income rather than deducted from it.
There are a myriad of codes as a variation to the above. Some more common tax codes used are 0T meaning no tax free allowance has been applied whilst a BR code means basic rate tax has been applied.
If you have a BR code, all your income is being taxed at basic rate. If you think you will be a higher rate tax payer, then you may be underpaying if this is the case. If you are a basic rate tax payer, you are likely to be overpaying your tax, as you are not receiving any of your personal allowance whilst the BR code is in force.
A tax code ending in W1, M1 or X means that your employment income and tax calculated is looked at in isolation for the pay frequency you’re paid for. HMRC calls this an emergency tax code but that’s a bit of a misnomer. It’s a temporary code often used when changing jobs. W1, M1 or X applied to your code could simply mean your circumstances changed from this point onwards in the tax year rather than for the full year.
A code with prefix S indicates you are a Scottish tax payer and a C prefix means your income is taxed using the Welsh tax tables.
It’s important to make sure you are being taxed under the correct regime as the income tax rates in each country diverge.
A couple to watch out for are SD0 income taxed at Scottish intermediate rate (21%), SD1 taxed at Scottish higher rate (42%), SD2 taxed at Scottish advanced rate (45%) and SD3 indicates the Scottish top rate (48%).
This can be slightly confusing with the rest of the UK where D0/CD0 means higher rate tax payer and D1/ CD1 indicates income is taxed at the additional rate.
Check your coding notices carefully for each tax year especially if your circumstances have recently changed. Often the code has been changed for the current year but subsequent years are left untouched. You can also check your coding notices online via your personal tax HMRC gateway login or for a more generic check, click here.
If all else fails, a call to HMRC might be best, have your National Insurance ready and set aside a good half hour waiting to speak to an advisor. Good luck!
