Taxing times: Demystifying tax codes

We’ve all been there: looking at the latest payslip to make sure everything looks alright, glancing over the tax code, not having a clue what it means and going about your merry way.

Well, no more! The tax code is an essential part of your financial picture each year. With the millions of people in the UK and each with changing circumstances, HMRC inevitably gets them wrong sometimes - so it’s up to you to right any mistakes.

Let’s get into the details of what exactly each part of the tax code means so you can pinpoint any issues with your own and get the situation sorted.

Getting to know your tax code

A recent Canada Life survey found that Brits overpay £8.2 billion in tax because their tax codes are wrong, while 16% have never checked their tax code even once. Yikes!

It’s proof that making sure you’re on the correct tax code might be more valuable than you think if you’re due a tax refund. Let's dive into the different letters and their meaning to ensure you’re not under or overpaying those precious pennies.

L codes: These are the most common tax codes for people with one job and no extra untaxed income. The numbers before it is your personal tax-free allowance; for instance, most people will have 1257L as their tax code this year, as the personal allowance threshold is £12,570.

0T codes: This code is for when your personal allowance has been used up (if you have more than one income, for example) or you haven’t given your employer your P45 to calculate your tax correctly.

M and N codes: These are to do with the marriage allowance, where spouses can transfer portions of their personal allowance between one another. ‘M’ means you’ve benefited from a transfer of 10% of your partner’s personal allowance, and ‘N’ means you’ve given 10% of your allowance to your spouse.

BR, D0 and D1 codes: These codes reflect that all of the income from whichever source you’re looking at (usually a payslip) is taxed. BR means the income is taxed at the 20% basic rate, D0 is for the 40% higher tax rate and D1 is the 45% additional rate.

K codes: This code means you have income that isn't being taxed another way and it's worth more than your tax-free allowance. The ‘K’ status ensures you’ll pay tax on the excess.

T codes: This is when your tax code needs reviewing by HMRC. Nothing to worry about usually, as it can happen if you’re earning over £100,000 and your personal allowance needs to be checked or if you have complex tax affairs.

W1 or M1 codes: These are emergency tax codes for either ‘week 1’ or ‘month 1’, depending on your pay. The codes show that you’re just being taxed on the amount you’ve earned on that payslip and no more. An example of this could be students working seasonal jobs.

NT codes: You don’t pay any tax on this particular income stream (lucky you!). It only applies to a few circumstances, like tax-free pension pots or specific self-employed routes.

What to do if your tax code is wrong

If your tax code is wrong for any reason, it’s up to you to get it sorted. Sometimes the codes can get mixed up if you change jobs, start drawing from a pension or open another income stream.

The first step is contacting HMRC either on the phone, online or by post. You might also need to speak to your employer to see if they can resolve the issue. Be sure to check your next payslips to ensure the changes have been made.

If you’re due a refund, HMRC should send you a P800 notification saying so. Not all letters from the taxman are bad! But if you haven’t gotten a letter and believe you’re due a refund, it’s back to HMRC to request it.

If you’ve overpaid tax in the current tax year then you’ll be given a tax code adjustment, so you pay less tax throughout the rest of the tax year to balance out your accidental overpayment. If it’s a former tax year you’ve overpaid on, you’ll get a lump sum back from HMRC. 

The opposite can also happen - if you’ve underpaid in the current tax year then HRMC can adjust your tax code so you’re paying slightly more across the rest of the year to avoid a nasty bill at the end of it.

Wrapping up

Checking your tax code is simple, but getting it changed and sorting a refund can take time. If you have an accountant, they can keep on top of everything for you and ensure you’re not paying too much or too little tax. 

If anything’s wrong, they can contact HRMC on your behalf to save you time and even sort out the tax refund if you’re due one - happy days!

If you need help with your tax code or have any questions, BXD Accounting is your one-stop shop for your accounting and tax needs.