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Code breaking: what does your #tax code mean?

calculator 178127 640I always open brown envelopes from HMRC expecting the worse. This morning I got my tax code notice for the 2018-19 tax year. Your tax code is important because it’s used by your employer(s) and/or pension providers to work out how much tax to take off your pay or pension – so if it’s wrong you could be paying too much or too little tax. Despite what you might think, you don’t want to pay too little tax – you’ll only have to pay it eventually. So you need to check it to make sure it is right – and tell HMRC if it’s wrong.

But how do you work out whether it’s right? A tax code is made up of numbers and letters. The numbers are based on the tax-free personal allowance you get and the letter(s) explain your situation. If you are a basic rate taxpayer who has tax deducted by your employer and qualifies for the full personal allowance of £11,850 then your tax code would be 1185L because the last digit in the tax free amount is removed. If (like me) you have income you haven’t paid tax on then that is taken away from the personal allowance as are the value of any benefits you get from work (such as medical insurance or a company car). This produces a figure for your tax-free allowance for the year – so, for example, if you had benefits worth £5,000 then you’d have an allowance of £6,850 (£11,850-£5,000) and the numbers part of your tax code would be 685.

Now for the letter bit: there are more than a dozen permutations (you can see the whole list at https://www.gov.uk/tax-codes if you feel up to it). The L code tells your employer you get the standard Personal Allowance; M means you’ve had 10% of your partner’s Personal Allowance transferred to you; N is the reverse of M. W1 or M1 are emergency tax codes and are temporary – used if you’ve just started a new job, for example. A K code (in this case, the letter is at the start of your code) means your income is above your tax free allowance and you aren’t being taxed another way on it. This might be because you get benefits you need to pay tax on.

I’ve checked my code and it is right: there is lots of help on the www.gov.uk site where you can check yours is correct. Honestly, it’s not that hard: if I can do it, so can you.

See our guide to tax here

Do you find tax just too taxing? Start a debate on our forum here

 

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Monday, 10 December 2018