HMRC Tax Codes: How They Calculate Your Take-Home Salary

A recent article on IT Contracting has given some helpful advice on how HMRC tax codes affect your take-home pay. HMRC issues everyone with a tax code in order to inform your employer, so that they will be able to work out the amount of tax that needs to be deducted from your salary.

The series of numbers and letters in your tax code can often be confusing if you are unsure of their meaning, so the article looks at what they signify, and how they will affect your pay.

Usually, you will receive a tax code notice between January and March, although this may come at other times of the year if your situation has changed – for example, if you file your self-assessment tax return months prior to the deadline.

IT Contracting gives the following example: if you are entitled to the full personal allowance during 2014-2015 (this would be tax code 1000L) but then you go on to earn more than £100,000 during 2014-2015, your tax code will be updated for the following year, as they presume you will earn the same amount.

Typically, a tax code is a series of numbers followed by a single letter. This informs your employer of the value of your personal allowance for the current tax year, taking into account any special circumstances which may affect how much tax is deducted from your pay.

The simplest way to look at it is to multiply the numbers in your tax code by ten: this is the value of your tax-free allowance. For example, 400L means that you are entitled to earn £4,000 free of income tax. The letters after the series of numbers also mean different things. For more details on what the letters signify, visit the gov.uk website here: https://www.gov.uk/tax-codes/letters-in-your-tax-code-what-they-mean.