Tax codes
Everyone is issued with a tax code by HMRC so employers can calculate and deduct the correct amount of tax from salary payments. On the face of it, tax codes are simple, but there is sometimes more to them than meets the eye. Checking that your tax code is correct each year will ensure that you pay the correct amount of tax and avoid any unexpected tax bills.
Questions about your tax code?
If you think your code is wrong you’ll need to let HMRC know by calling them on 0300 200 3300 or use their online Check your Income Tax service
Your Tax Code reflects your Personal Allowance
Everyone has a Personal Allowance which is the amount of income they can receive before tax is paid. This Personal Allowance is reflected in a tax code to tell an employer how much tax-free income someone has in that tax year.
For the 19/20 tax year most people will have a tax code of 1250L. This is based on their Personal Allowance of £12,500, divided by 10. The letter in the tax code provides more information to the employer so they can calculate taxes payable.
Example: Someone with a 1250L tax code earning £15,000 will not pay tax on the first £12,500. The earnings over the Personal Allowance, i.e. £2,500 will have basic rate tax deducted by their employer.
Tax codes lower than the Personal Allowance
HMRC will calculate an individual’s tax-free Personal Allowance based on the current records they have. Income that tax hasn’t been paid on, unpaid tax from a previous year and, the value of any benefits from a job (e.g. a company car). The income that tax hasn’t been paid on is subtracted from the Personal Allowance and this becomes the new tax-free income allowed in the tax year. This tax-free allowance is divided by 10 to reflect it in the tax code for the year.
Where to find your tax code
You’ll have a tax code for each employer you have so for example, if you are only employed through your limited company, you’ll have just one tax code. If however, you have multiple employers, e.g. a second job, you’ll have a tax code for each employer. This is common for startups when the employee remains in employment whilst setting up their own company.
The tax code for a particular employer can be found on:
- payslips from that employer
- P45 from the employer if you have left that job
- P60 from the employer that they provide at the end of the tax year
- HMRC PAYE coding notice letters
How a second job affects a tax code
If someone has more than one employer it is likely that each will use different tax codes.
Recap
An individual’s Personal Allowance is the amount they can earn tax-free in a year. The Personal Allowance for 19/20 is £12,500, therefore, the first £12,500 of income is tax-free.
Typically the employer for the individual’s main job will use all the individual’s Personal Allowance. In other words, the full tax code 1250L would be applied to the pay received from that employer
In starting a second job the new employer would notify HMRC of them starting without providing a P45 (i.e. they’ve not left their other job). In doing so HMRC instructs the new employer to apply a BR tax code. This means no Personal Allowance is allocated to that income; therefore tax will be deducted from all earnings from the second job. This is ideal if the first job pays more than the individual’s Personal Allowance, however, the second job may become the main source of income.
There are typically two options:
- Leave the tax codes as they are and pay tax on all income from the second job. The downside is if the main job will not use up all the Personal Allowance for the year you’d overpay tax and then would have to wait for a tax rebate from HMRC
- Call HMRC and ask them to split the tax code between the jobs. This way the Personal Allowance is shared across both jobs
Tax code notices
The Personal Allowance usually increases each tax year (6 April to 5 April) which means tax codes increase on 6 April. You can, however, receive tax code notices when your personal circumstances change too.
A tax code can also be changed during the tax year, for example, if HMRC are notified that you start or stop getting:
- income that isn’t being taxed such as from interest or rental properties
- benefits from your job that you need to pay tax on (known as Benefit In Kind), or
- State benefits such as the State Pension
Notification to HMRC commonly happens when:
- an individual files their Self Assessment Tax Return
- a form P11D to declare benefits in kind is submitted
- a new job is started and the employer notifies HMRC, or
- the individual calls HMRC to discuss a change in circumstances e.g. they no longer have a company car
When a tax code changes HMRC will send a Notice of Coding letter to the individual to explain why and how it has been calculated. HMRC also send the new tax code to the individual’s employer or accountant electronically via RTI which then must be applied during future payroll calculations.
Scottish Tax Codes
HMRC will determine whether or not you are a Scottish taxpayer based on where your main place of residence is. If you are a Scottish taxpayer, your 2019/20 PAYE tax code will have the letter ‘S’ at the front. You can find more information on the Scottish PAYE tax codes and rates here
Understanding your tax code – Tax code letters and their meanings
The letter in a tax code provides more information for the employer so they can calculate how much tax to collect.
Tax code letter | Meaning |
L | You’re entitled to the normal tax-free Personal Allowance |
P | Your birthday is between 6 April 1938 and 5 April 1948 and have a larger tax-free Personal Allowance |
Y | Your birthday was before 6 April 1938 and you have a larger tax-free Personal Allowance |
T | Other calculations have been used to determine your Personal Allowance and tax code, e.g. it’s been reduced due to other untaxed income |
0T | Your Personal Allowance has already been fully used or you started a new job and don’t have a P45 |
BR | All your income with your employer is taxed at the 20% basic rate. This is often when you have a second job or your employer is waiting for a tax code from HMRC |
D0 | All your income is taxed at the higher rate (40%) |
D1 | All your income is taxed at the additional rate of tax (45%) |
NT | You are not paying tax on this income |
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