Decoding your tax: An essential guide to tax codes
Have you ever opened a payslip to reveal a new tax code that you do not understand? Has this happened to you more times than you would like to admit? Do you secretly hope that payroll and HMRC have it all in hand so you don’t have to do anything?
Anaesthetic training is complex, normally involving many employers and plenty of P45s. There are so many opportunities for an incorrect or emergency tax code to find its way onto your payslip. Tax codes are complicated and I, like so many others, have personal experience of tax woes! In order to avoid tax problems, it is essential that you understand your tax code, and recognise when it is wrong.
Simply put, the tax code tells your employer what rate you should be taxed at. Your tax code will normally start with a number and end with a letter.
What do the numbers actually mean?!
The numbers in your tax code indicate how much tax-free income you get in that tax year. Each of us has a 'Personal Allowance'. Your Personal Allowance is, effectively, the amount of income you can have in that tax year before you start paying tax. The standard Personal Allowance is determined and published by the Government for each tax year and was set at £12,500 for the 2019/20 tax year. Table 1 shows the current tax rates you pay in each band if you have a standard Personal Allowance of £12,500.
Table 1
| Band
|
Taxable Income
|
Tax rate
|
| Personal Allowance
|
Up to £12,500
|
0%
|
| Basic rate
|
£12,501 to £50,000
|
20%
|
| Higher rate
|
£50,000 to £150,000
|
40%
|
| Additional rate
|
over £150,000
|
45%
|
Income that you have not paid tax on (such as untaxed interest or part-time earnings), and the value of any benefits from your job, are added up and taken away from your personal allowance. What’s left is the tax-free income you are allowed in a tax year.
To find out how much income you can earn in a year before you need to pay tax, simply add a zero to the number shown. For example, a tax code 1250L means you can earn £12,500 a year before paying any income tax.
And what about the letters?!
Letters in your tax code refer to your situation and how it affects your Personal Allowance (Box 1).
Box 1
| Letters
|
What they mean
|
| L
|
You are entitled to the standard tax-free Personal
Allowance. This means that you are under 65
and eligible for the standard tax-free Personal
Allowance – this is the amount you can earn before
Income Tax kicks in
|
| T
|
Your tax code includes other calculations to work
out your Personal Allowance
|
| 0T
|
Your Personal Allowance has been used up, or
you’ve started a new job and your employer does
not have the details they need to give you a tax
code
|
| BR
|
All your income from this job or pension is taxed
at the basic rate
|
| D0
|
All your income from this job or pension is taxed
at the higher rate
|
| D1
|
All your income from this job or pension is taxed
at the additional rate
|
| NT
|
You’re not paying any tax on this income
|
S or C Prefix In Scotland, a prefix of S may be seen on your tax code. This indicates that your income or pension is taxed using the rates in Scotland. For example, SBR means all your income from this job or pension is taxed at the basic rate in Scotland.
Likewise, in Wales, a prefix of C denotes your income or pension is taxed using the rates in Wales, for example, CD0 means all your income from this job or pension is taxed at the higher rate in Wales.
Tax Codes ending with W1 or M1 These are emergency tax codes, which are issued if HMRC does not have enough information about you to send your employer the correct code. The first part of the emergency tax code for 2019/20 is 1250 – the same as the basic Personal Allowance code. This normally ensures that you receive the basic amount of monthly tax-free pay. However, it doesn’t take into account any other relief or allowances. Emergency tax codes are temporary.
K Code Another code that many people may have is the K code. This is essentially the reverse of an L code and is used when your level of untaxed additional income exceeds your Personal Allowance. This can happen if you are paying tax that you owe from a previous year through your wages or pension, getting State benefits on which you need to pay tax, or getting benefits from work.
Ok… how can I prevent or rectify incorrect tax codes?
If you think your tax code might be wrong, you can use the online ‘Check your Income Tax’ service to tell HMRC about a change in your circumstances. If you cannot use the online service, you can contact HMRC by phone or post. If you are put on an emergency tax code when you change jobs, do contact HMRC as soon as possible. When you receive your P45 form, provide a copy to your employer as soon as possible, so they can aid the process and contact HMRC early.
Then what happens?
After your tax code changes, HMRC will adjust your tax code so that you pay the right amount of tax across the year. They will write to you or email you when your tax code has been updated. They will also tell your employer or pension provider that your tax code has changed. Your next payslip should show your new tax code, and adjustments to your pay, if you were paying the wrong amount of tax.
This is only a brief guide from a fellow trainee. I hope it helps you spot the incorrect code on your payslip and fix it. However, if you have a specific question or problem regarding tax, I strongly recommend you seek the services of a regulated tax expert and contact the HMRC.
Sally El-Ghazali
Chair, Association of Anaesthetists Trainee Committee
Anaesthetics/ICM Registrar, London