If you receive a regular income in the UK, you will need a tax code. But have you ever wondered about the meaning of your tax code?
What is a tax code?
Your tax code is assigned by HMRC. It will determine how much tax you pay on your income. It is therefore in your best interest to make sure you have the correct tax code. Otherwise, you could end up out of pocket.
If you are uncertain about what your tax code should be, don’t worry. This article outlines the most common tax codes and their meaning.
This information refers to the financial year 2020/2021 but could be subject to change by the UK government.
What are the common tax codes and who are they used for?
L: standard personal allowance
This is the most common tax code. If you have this code, you are benefitting from the personal allowance. It is used for employees with a single job, no other untaxed income and no unpaid tax or taxable benefits (such as a company car). The personal allowance is £12,500, so the complete code is 1250L.
M & N: marriage allowance
If you are married or in a civil partnership and your annual income is £12,500 or less, you might be able to pass £1,250 of your personal allowance to your partner.
Your code will be M if you are receiving the additional personal allowance from your spouse or civil partner. Your code will be N if you are giving the additional personal allowance to your spouse or civil partner.
BR, D0 and D1: multiple incomes
Each source of income you receive will be assigned a tax code. If you have multiple incomes, you will need to assign your personal allowance to one of them.
You will normally be asked to state which income is your main income. This income will be taxed, minus your personal allowance.
All other incomes will be taxed without an allowance being applied to them. This means that if you pay basic rate tax, the code assigned to your additional incomes will be BR. If you pay higher rate tax, the code will be D0. If you pay additional rate tax, the code will be D1.
K: untaxed income exceeding your personal allowance
If you owe tax from a previous tax year, HMRC can get this money back from you by reducing your personal allowance. This means that your tax code will have a smaller figure instead of the usual 1250 in front of the ‘L’ code.
However, if the amount you owe exceeds the £12,500 personal allowance and there is nothing left to reduce, you will be assigned a K code. This tells HMRC that you are not entitled to a personal allowance and that you owe additional tax on your income.
W1 and M1: emergency tax codes
These are emergency tax codes depending on whether you are paid weekly (W1) or monthly (M1).
Are there variations in Scotland and Wales?
Yes, there are. Employees whose main home is in Scotland or Wales are assigned different tax codes.
CBR, CD0, CD1: employees whose main home is in Wales
The income tax rates are the same as in England, so you pay the same overall amount of tax.
SBR, SD0, SD1, SD2: employees whose main home is in Scotland
The income tax rates in Scotland are different from those in England and Wales. The tax codes represent earners on basic rate, intermediate rate, higher rate and top rate respectively.
For further information on the income tax rates in Scotland, check the gov.uk website.
What if my tax code is wrong?
You will need to contact HMRC as soon as possible so that they can make the appropriate change.
Make sure you have all the relevant information in front of you before you contact HMRC. They will ask you for your National Insurance number and your tax reference number. Both numbers should be on your payslip.
In addition, if you are self-employed or you have a second job, you may be asked for your Unique Taxpayer Reference (UTR) number.
Do check your tax code at the beginning of every financial year to ensure it is correct. This is especially important if you owe money from a previous tax year and your personal allowance has been reduced.
Further information on tax codes and their meaning is available on the gov.uk website.
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