The anatomy of a tax code

When we receive our weekly or monthly income,				personal tax code means. The numbers and
many of us are bewildered about what our				letters throw us into a state of confusion, and all
personal tax code means. The numbers and				we can fathom out, is that a fraction of our
letters throw us into a state of confusion, and all				income has been deducted and collected by HM
we can fathom out, is that a fraction of our				Revenue and Customs to pay for public services.
income has been deducted and collected by HM				Tax codes can be confusing at the best of times,
Revenue and Customs to pay for public services.				and a number of questions surround their
Tax codes can be confusing at the best of times,				anatomy.
and a number of questions surround their
anatomy.
				A tax code is issued by the HMRC and used by
				your employer or pension provider to calculate
A tax code is issued by the HMRC and used by				the amount of tax to deduct from your pay or
your employer or pension provider to calculate				pension. This is a simple guide to helping people
the amount of tax to deduct from your pay or				understand tax codes a little bit more, to help you
pension. This is a simple guide to helping people				check what to look for, where to find it and what
understand tax codes a little bit more, to help you				to do if you are paying too much, this is really
check what to look for, where to find it and what				important if you have one or more jobs to check
to do if you are paying too much, this is really				your code is right.
important if you have one or more jobs to check
your code is right.
				Before establishing the various codes, there are
				two terms to distinguish and to help understand
Before establishing the various codes, there are				what they mean to your tax code; Personal
two terms to distinguish and to help understand				Allowance is the amount of taxable income that
what they mean to your tax code; Personal				you can receive tax free in the current tax year.
Allowance is the amount of taxable income that				Another is ‘PAYE', this means pay as you
you can receive tax free in the current tax year.				earn, and is the level of earning at which tax
Another is ‘PAYE', this means pay as you				becomes payable.
earn, and is the level of earning at which tax
becomes payable.
				The structure of a tax code

The structure of a tax code				A tax code is usually made up of several
				numbers and a letter for example 147L or K587.
A tax code is usually made up of several				If you multiply the number in your tax code by
numbers and a letter for example 147L or K587.				10, you'll get the total amount of income you can
If you multiply the number in your tax code by				earn in a year before paying tax.
10, you'll get the total amount of income you can
earn in a year before paying tax.
				Where do you find your tax code?

Where do you find your tax code?				There are a number of places where you can
				locate your tax code, one being on your P45
There are a number of places where you can				form when you leave a job. This is very
locate your tax code, one being on your P45				important to give this to your new employer
form when you leave a job. This is very				when your change jobs. If you do not have a P45
important to give this to your new employer				your employer will provide you with a P46 to fill in
when your change jobs. If you do not have a P45				and sign, then a tax code will be allocated to you
your employer will provide you with a P46 to fill in				by your employer. HMRC will then process your
and sign, then a tax code will be allocated to you				P46 and were necessary revise your tax code.
by your employer. HMRC will then process your				More importantly, if you have paid too much tax
P46 and were necessary revise your tax code.				you will be entitled to a refund, alternatively if you
More importantly, if you have paid too much tax				have not paid enough tax, your tax code will be
you will be entitled to a refund, alternatively if you				amended to collect the underpaid tax. In addition
have not paid enough tax, your tax code will be				your tax code can be found on your ‘PAYE
amended to collect the underpaid tax. In addition				Coding Notice' sent to you by your Tax Office.
your tax code can be found on your ‘PAYE				This is usually sent by post before the start of
Coding Notice' sent to you by your Tax Office.				each tax year, on the other hand it may also be
This is usually sent by post before the start of				sent to you at another time if something has
each tax year, on the other hand it may also be				changed, for instance if you start receiving a new
sent to you at another time if something has				source of income, or a new company benefit. A
changed, for instance if you start receiving a new				Payroll Management company can assist with tax
source of income, or a new company benefit.				codes.

There are several Common tax codes to be
aware of;				There are several Common tax codes to be
				aware of;

L - Tax code ‘L' is for those eligible for the
basic Personal				L - Tax code ‘L' is for those eligible for the
Allowance, an example would be seen as				basic Personal
647L for the 2010-2011 tax				Allowance, an example would be seen as
year. Also can be used for emergency tax				647L for the 2010-2011 tax
codes				year. Also can be used for emergency tax
				codes

P - Tax code ‘P' is for persons aged 65 to 75
who are eligible for				P - Tax code ‘P' is for persons aged 65 to 75
the full Personal Allowance.				who are eligible for
				the full Personal Allowance.

V - Tax code ‘V' is for persons aged 65 to
75 who are eligible for				V - Tax code ‘V' is for persons aged 65 to
the full Personal Allowance and the full				75 who are eligible for
married couple's				the full Personal Allowance and the full
allowance, and estimated to be liable at the				married couple's
basic rate of tax.				allowance, and estimated to be liable at the
				basic rate of tax.

Y - Tax code ‘Y' is for persons aged 75 or
over who are eligible for				Y - Tax code ‘Y' is for persons aged 75 or
the full Personal Allowance.				over who are eligible for
				the full Personal Allowance.

T - Tax code ‘T' highlights if there is any
items in your tax codes				T - Tax code ‘T' highlights if there is any
that need to be reviewed, for example the				items in your tax codes
income related				that need to be reviewed, for example the
reduction to the Personal Allowance.				income related
				reduction to the Personal Allowance.

K - Tax code ‘K' is for persons whose total
allowances are less than				K - Tax code ‘K' is for persons whose total
their total deductions.				allowances are less than
				their total deductions.

How does the K code work?
				How does the K code work?
The untaxed income on which tax is still due is
known as ‘deductions', and when your				The untaxed income on which tax is still due is
deductions are more than your allowances you'll				known as ‘deductions', and when your
be given a K code to ensure you pay tax on the				deductions are more than your allowances you'll
excess. Whereas with other tax codes the				be given a K code to ensure you pay tax on the
number indicates the amount of income you can				excess. Whereas with other tax codes the
have tax free, the number in a K code multiplied				number indicates the amount of income you can
by ten broadly indicates how much must be				have tax free, the number in a K code multiplied
added to your taxable income to take account of				by ten broadly indicates how much must be
the excess untaxed income you receive. For				added to your taxable income to take account of
example, K497 means your untaxed income was				the excess untaxed income you receive. For
approximately £4970 greater than your taxable				example, K497 means your untaxed income was
income, as a result approximately £4,970 must				approximately £4970 greater than your taxable
be added to your total taxable income to ensure				income, as a result approximately £4,970 must
the right amount of tax is collected.				be added to your total taxable income to ensure
				the right amount of tax is collected.

What is an Emergency tax code?
				What is an Emergency tax code?
In some instances your employer or pension
provider will have to use an ‘emergency' or				In some instances your employer or pension
‘special basis' code until HRMC has worked out				provider will have to use an ‘emergency' or
what your tax should be. This usually happen if				‘special basis' code until HRMC has worked out
you start a new job and you do not have a P45				what your tax should be. This usually happen if
for example. While you are on emergency code				you start a new job and you do not have a P45
you will receive a basic Personal Allowance which				for example. While you are on emergency code
may or may not be right for you. However once				you will receive a basic Personal Allowance which
HMRC identifies more about your previous pay				may or may not be right for you. However once
and tax, your tax code will be reviewed and				HMRC identifies more about your previous pay
changed if necessary. In addition, if you have paid				and tax, your tax code will be reviewed and
too much tax under this code you will receive a				changed if necessary. In addition, if you have paid
refund.				too much tax under this code you will receive a
Other tax codes to be aware of;				refund. Payroll outsourcing takes care of tax
				codes for you.
If your tax code has two letters but no number,
or has the letter ‘D' followed by a ‘0', it is				Other tax codes to be aware of;
normally used when you have two or more
sources of income and all of your allowances have				If your tax code has two letters but no number,
been applied to the tax code and income from				or has the letter ‘D' followed by a ‘0', it is
your main job or pension.				normally used when you have two or more
				sources of income and all of your allowances have
				been applied to the tax code and income from
				your main job or pension.
BR - Tax code ‘BR' is used when all your
income is taxed at the basic
rate which is currently 20 per cent (this
tax code is most				BR - Tax code ‘BR' is used when all your
commonly used for a second job or				income is taxed at the basic
pension).				rate which is currently 20 per cent (this
				tax code is most
				commonly used for a second job or
D0 - Tax code ‘D0' is used when all your				pension).
income is taxed at the
higher rate of tax which is currently 40
per cent (this tax code				D0 - Tax code ‘D0' is used when all your
is most commonly used when for a				income is taxed at the
second job or pension).				higher rate of tax which is currently 40
				per cent (this tax code
				is most commonly used when for a
NT - Tax code ‘NT' is used when no tax is to				second job or pension).
be taken from your
income or pension.
				NT - Tax code ‘NT' is used when no tax is to
How to work out your tax code?				be taken from your
				income or pension.
There are four simple steps to identify your
personal tax code;				How to work out your tax code?

Step one; Add up your tax allowances (in many				There are four simple steps to identify your
cases, personal allowance and any blind personals				personal tax code;
allowance, some cases may include certain job
expenses)				Step one; Add up your tax allowances (in many
				cases, personal allowance and any blind personals
Step two; Income you have not paid tax on (for				allowance, some cases may include certain job
example: untaxed interest or part time earnings)				expenses)
and any taxable employment benefits are added
up.				Step two; Income you have not paid tax on (for
				example: untaxed interest or part time earnings)
Step three; the total amount of income you have				and any taxable employment benefits are added
not paid any tax on, is called ‘deductions',				up.
subtract your deductions away from your total
amount of tax allowances. The amount that you				Step three; the total amount of income you have
are left with is the total of tax free income you				not paid any tax on, is called ‘deductions',
are allowed in a tax year.				subtract your deductions away from your total
				amount of tax allowances. The amount that you
Step 4; now for the creation of your tax code,				are left with is the total of tax free income you
divide the amount of tax free income you are				are allowed in a tax year.
left with by 10 and add the figure you are left
with to the letter which fits your circumstances,				Step 4; now for the creation of your tax code,
as a result you are left with your tax code.				divide the amount of tax free income you are
				left with by 10 and add the figure you are left
Example – 217L				with to the letter which fits your circumstances,
				as a result you are left with your tax code.
You are entitled to the basic personal allowance,
£2,170, therefore this cash amount is to be				Example – 217L
taken away from your total taxable income and
you pay tax on what is left.				You are entitled to the basic personal allowance,
				£2,170, therefore this cash amount is to be
Changes that might affect your tax code;				taken away from your total taxable income and
				you pay tax on what is left.
You must keep the HRMC informed of any
change in your circumstances, for example, if you				Changes that might affect your tax code;
get married, form a civil partnership, separate,
start or receive a second income or more. In the				You must keep the HRMC informed of any
case of a change in circumstances, the amount of				change in your circumstances, for example, if you
untaxed income you get will either increase or				get married, form a civil partnership, separate,
reduce. Always keep a note of all coding letters				start or receive a second income or more. In the
for reference, as if you have to question or				case of a change in circumstances, the amount of
check if you are paying the right amount of tax,				untaxed income you get will either increase or
you have all the necessary information at hand. If				reduce. Always keep a note of all coding letters
you have the wrong tax code you could end up				for reference, as if you have to question or
paying too much or too little tax, hence why is so				check if you are paying the right amount of tax,
imperative to understand tax codes.				you have all the necessary information at hand. If
				you have the wrong tax code you could end up
When we receive our weekly or monthly income,				paying too much or too little tax, hence why is so
many of us are bewildered about what our				imperative to understand tax codes.

TaxHelp

The anatomy of a tax code