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Understanding your Tax Code 2017-18

HMRCTaxReturn

If you are a Liquid Friday umbrella employee, we use your tax code to work out how much tax to deduct from the payments we make to you.

Your tax code determines how much you can earn in a financial year (April – March) before you have to start paying income tax. This is known as your personal allowance. This changes every year and is set by the Chancellor in the budget.

You might receive a PAYE Coding notice from HMRC before the beginning of a tax year or if your tax code changes at any point during the year.

The standard tax code for the current year is 1150L. This applies to most taxpayers and means you can earn £11,500 per year, on a cumulative basis, without paying any tax.  

What this means

If you get paid weekly the first £221.15 of your wages is tax free. If you get paid monthly the first £958.33 of your wages is tax free.

Letters in your tax code explained

L – you’re entitled to a basic tax-free personal allowance

BR – stands for Basic Rate. This means that your entire income is is subject to 20% tax and you have no personal allowance, and does not take into account higher rate tax brackets.

DO – as above but your entire income is taxed at 40 % (higher rate) tax

K – if your tax code is pre-fixed with a K it usually means that HMRC are recovering tax you owe

0 – zero tax free allowance, takes into account 40% tax bracket

OT – this means that your total personal allowance for the year has already been used

M – stands for “marriage allowance” and means that 10% of your partner’s personal allowance has been transferred to you

N – the reverse of above – you’ve transferred 10% of your personal allowance to your partner

S – your income is taxed at the Scottish rate of income tax

T – your tax code takes into account other calculations to work out your personal allowance, for example it has been reduced because your income is over the amount for basic rate tax

D1 – all your income is taxed at the additional rate of 45%. This is usually where you have income over £150,000

NT – you are not paying any tax on this income

“X” marks the spot

A “W1/M1” or just “X” suffix on your tax code (such as 1100LX) stands for “Week 1” or “Month 1”. This indicates that HMRC has asked Liquid Friday, as your employer, to operate your code on a non-cumulative basis.

This means that your tax will only be calculated on the payment being processed; it does not take into account the tax you have already paid in the tax year to date.

A “cumulative” code (such as 1100L) works out the tax due on your total taxable pay to date every time you get paid. Any overpaid tax will be rebated and any underpaid tax will be recovered automatically.

For example, if you were not paid in a particular pay period, a cumulative code would automatically give you the benefit of the tax allowances for the missed period on the next payment. An “X” code would not.

If your tax code reverts to a cumulative basis at any time before the end of the financial year (5th April), the next payment would issue the missed tax allowances.

If HMRC does not issue a cumulative tax code before the end of the tax year, any overpayment will be rebated when they reconcile the year or when you complete a self assessment tax return. You will always start a new tax year with a cumulative tax code.

Your tax code will usually update automatically upon receipt of a P6 (Coding Notice) from HMRC.

If you think your code is wrong

If you think your tax code is wrong, for example if the numbers and letters don’t accurately reflect your situation, you need to contact HMRC. You can call them on 0300 200 3300 or fill in a PAYE Coding Notice query form

HMRC will then contact Liquid Friday automatically if there are any changes. This can take up to 10 days.

Pick our brains

If you have any queries about your tax code, we will do our best to help.

Get in touch with the Liquid Friday Team  

Find out how much you could save outsourcing your back-office process by trying out our Savings calculator.
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