Everybody who pays tax has a tax code – it’s simply a representation of the tax bracket under which you fall. If you’ve recently changed your employment status, whether that’s from employed to self-employed or otherwise, your tax code might have changed!
Tax codes are important as they inform you or your business how much income tax you need to pay to HMRC. If your tax code is incorrect, you may end up paying more or less than you’re supposed to! This can lead to all sorts of extra administrative work.
Let’s start by looking at why tax codes are so important.
Your Tax Code
Tax codes were designed to simplify the process of notifying businesses of how much income tax their employees or owners need to pay. If your tax code is wrong, you might end up overpaying or underpaying based on what your entitlement may be.
You can check your Income Tax requirements using the government website. That way, you can find out what your tax code is, whether it has changed and how much tax you’ll have to pay for the current fiscal year.
If you’ve recently started your own limited company or become self-employed, you may need to inform HMRC of these changes as it could affect how much tax you’re entitled to pay.
What does a Tax Code look like?
Tax codes tend to take a similar looking format; they often start with a number and end with a letter. This letter changes depending on some personal allowances that may influence how much tax you need to pay. For example, most people’s tax code ends with the letter ‘L’. That means that you’re entitled to the standard tax-free personal allownce.
If you’re married, you may receive a marriage allowance represented by either an ‘M’ or an ‘N’. In the first case, you’ll receive a transfer of 10% of your partner’s personal allowance, whereas in the second instance, you’ll transfer 10% of your personal allowance to your partner.
There are all manner of letters represented within your tax code – take a look at the official government page for a full list and explanations of what they mean.
Before the letters at the end of the tax code are a series of numbers – these are a little more complicated. The numbers specifically tell your employer the value of the tax-free income you’re allowed in that tax year. For example, 1257L (the tax code used for individuals with a single job or person) is calculated using the following method:
- Your personal tax-free allowance is calculated by HMRC.
- Income for which you have not paid tax – like the value of a company car or part-time earnings – is added up and removed from your personal allowance.
- The final digit of this amount is removed.
Once your employer receives your tax code, they’ll know how much income tax you’re entitled to pay!
What is Emergency Tax?
Emergency tax codes are used when certain criteria are met. You may be given an emergency tax code if you have recently started a new job, if you’re working for an employer after being self-employed or if you receive company benefits or the State Pension.
In these instances, your tax code may change to one of the following: 1257 W1, 1257 M1 or 1257 X. These tax codes indicate that you’ll pay tax on all your income above the personal allowance.
It’s important to remember that these are temporary and your employer can help you inform HMRC of your updated tax code.
What if my Tax Code is Incorrect?
If you’ve checked your Income Tax online using the government service and feel that your tax code may be incorrect, it’s important that you inform HMRC. You can do this using the online service or, alternatively, contact HMRC by telephone by calling (inside UK) 0300 200 3300.
What if I need help with my tax duties?
In that case, you can Count on us! We started our business to look after all these pesky financial details and save you the time and energy – so you can focus on what really matters!
Take a look at some of our other guides if you need more information about tax services, or take a look at our website and see what we can do for you.