Of everything we get asked about in payroll, tax code queries have got to be one of the most common.
So as the clock resets on another new financial year, it’s the ideal opportunity for a refresher on tax codes, specifically on what the various numbers and letters mean and how they affect how much you take home.
Your PAYE tax calculation
If you are an employee, the PAYE tax system uses your tax code to determine how much pay you can receive before you start paying tax on your income.
This amount is known as your personal allowance. It is reviewed every year and is set by the Chancellor in the Budget.
If you are an employee of Liquid Friday, we use your tax code to work out how much tax to deduct from the payments we make to you.
Tax codes are updated annually to reflect changes in allowances. You may 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.
Updated tax rates for 2021/22
The personal allowance is increased to £12,570 for 2021/22 with a corresponding tax code of 1257L. This is an inflationary increase of £70 over the 2020/21 level of £12,500.
This applies to most taxpayers and means you can earn £12,570 per year, on a cumulative basis, without paying any tax.
Therefore, if you get paid weekly the first £242 of your wages is tax free. If you get paid monthly the first £1048 of your wages is tax free.
The bad news is that the allowance will remain frozen at this level for the next three years.
These tables show more detailed tax rates and thresholds for taxpayers in England, Wales and Northern Ireland.
What the letters in your tax code mean
The letters at the end of your tax code indicate your tax circumstances for that particular employment and determine how much tax you pay. If you have more than one job, you will have a tax code for each one.
L – you’re entitled to a basic tax-free personal allowance.
BR – stands for Basic Rate. This means that your entire income is subject to 20% tax and you have no personal allowance, and does not take into account higher rate tax brackets.
D0 – as above but your entire income is taxed at 40 % (higher rate) tax.
D1 – all your income is taxed at the additional rate of 45%. This is usually where you have income over £150,000.
K – if your tax code is pre-fixed with a K it usually means that HMRC are recovering tax you owe.
OT – this means that your total personal allowance for the year has already been used up.
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
R – All your income from this job or pension is taxed at the basic rate (for example, if this is your second job).
Y – you were born before 6th April 1938 and get a higher personal allowance.
NT – you are not paying any tax on this income.
Look out for the “X”
A “W1/M1” or just “X” suffix on your tax code (such as 1257LX) stands for “Week 1” or “Month 1”. This indicates that HMRC has asked 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 1257L) 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 coding notice from HMRC.
If you think your tax code is wrong
If you are a Liquid Friday umbrella employee, you can find your tax code in the bottom right hand corner of your payslip. You’ll also find it on your most recent P45, P60 or PAYE coding notice from HMRC.
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 using their online service or by calling 0300 200 3300.
HMRC will then contact Liquid Friday automatically with a revised tax code as required. This can take up to 10 days but as soon as we receive notification, we will apply the new code to your next payment.
If you have further queries please do get in touch with the team.