Tax Codes And Key Tax Dates

Currently, around 30m people suffer income tax each year, paying an average of just over £4,000 apiece. Around 3.5m of these pay something at the higher rate of 40%, but these people account for just over half of all income tax collected.

Tax Codes

Most of this income tax is collected through the PAYE system. To do this, HM Revenue & Customs will issue your employer with a tax code. This code tells your employer how much tax to take off your salary. It's worth looking into the calculation of your tax code to make sure there are no obvious mistakes. You can see your tax code on your pay slip or the P45 form you get when you leave a job. You should also get a coding notice sent to you by HM Revenue & Customs which illustrates how it is calculated.

Your tax code will look something like 489L or K117.

Let's deal with the letter first.

• L is used if you're eligible for the basic personal allowance.
• P and V are used if you're 65 to 74 and eligible for the full personal allowance. The latter means you are also entitled to a full married couples allowance.
• Y is used of you're 75 or over eligible for the full personal allowance.
• T is used if there are any other items HM Revenue & Customs need to review in your tax code.
• K is used if your tax deductions are more than your total allowances.
• BR means all your income is to be taxed at the basic rate.

The number represents one-tenth of the annual amount of tax-free allowance you'll get. So if your tax code is 489L, your employer will take off £4,890 off your annual salary before calculating the tax to be paid over. If you have a K117 code, then they would add £1,170 to your salary before making any calculations.

As well as your personal allowance, you could receive tax relief for some of the following via your tax code:

• Loan interest
• Job expenses and professional subscriptions
• Personal pension and Gift Aid relief (if you pay tax at the higher rate)

Common benefits that you might receive that could be taxed via your tax code include:

• Car and car fuel benefit
• Employer's loan benefit
• Medical insurance benefit
• Untaxed income e.g. rent
• Underpaid tax from the previous year (if you owe less than £2,000 and submit your tax return by 30 September, or 30 December if you do it online, you can effectively pay it off in monthly installments via a higher tax code rather having to pay it over in one lump sum.)

This guide from HM Revenue & Customs explains tax codes in detail.

Key Tax Dates

If you're filling in a tax return there are a number of key dates to be aware of. For example:

30 September 2005 - Send in the paper version of your tax return in by this date in order to get the taxman to tell you how much you have left to pay, if any, and to get any amount of £2,000 or less due for 2004/05 collected via your tax code in 2006/07.

30 December 2005 - Ditto for the online version of your tax return.

31 January 2006 - The last day tax returns can be submitted (otherwise you'll pay a fine) and the last day you can pay any remaining tax due for 2004/05, unless it's been collected via your tax code. This is also the day the first half of any payment on account you have to make for 2005/06 is due (generally speaking if you had a significant amount unpaid tax for 2004/05 you may be asked to make a payment on account for 2005/06)

31 July 2006 - The second half of any payment on account for 2005/06 is due.

That wraps up our look at income tax. In the next Fool School article we'll turn our attention to National Insurance.