Every year, millions of pounds are lost due to tax code errors.
With the most common tax code now being 1257L, it is important for individuals to understand the implications of their codes and how to avoid costly mistakes.
"It's absolutely essential that everyone checks their tax code," says financial expert & CEO of Moneyzine Jonathan Merry. "If your code is incorrect, you could be overpaying or underpaying taxes without even realising it."
Tax codes are assigned by HM Revenue and Customs (HMRC) based on the information they have about an individual's income. It is possible for this information to be inaccurate or out-of-date, resulting in incorrect taxes being taken from wages and pensions. This can mean a loss of thousands of pounds if left unchecked.
“What many people don’t realise,” Jonathan Merry says, “is that you are personably liable for making sure your tax code is correct. Not your workplace, not the Government, you! This means that you need to regularly check your tax code - at least once a year - to ensure that you’re paying the correct amount. There have been cases where people have had to pay back thousands of pounds in tax, an eye watering sum that would put many in a tight spot.”
Fortunately, there are ways to ensure you are paying the correct amount of tax. By regularly checking your payslips and ensuring that your tax code is correct, you can prevent any mistakes from occurring in the first place. If you think something may be wrong with your code, contact HMRC as soon as possible so they can update it accordingly.
Furthermore, those who wish to check their current tax situation can use HMRC's online tools such as ' Check Your Tax Code ' and ' Check Your State Pension '. These services are available free of charge and provide easy access to information about what an individual pays in taxes each year.
The most common tax codes (and what they mean)
In the UK, tax code’s can be broken down into two parts: the numeric portion and the letter portion. Here's a breakdown of each part:
Numeric portion: The numeric part of the tax code represents your tax-free personal allowance. In the case of "1257L," the numeric portion is "1257." This means that you have a tax-free personal allowance of £12,570 for the tax year.
Letter portion: The letter portion of the tax code provides additional information about your tax status and entitlements. In "1257L," the letter portion is "L." The letter "L" signifies that you are entitled to the standard tax allowances and deductions available for the tax year.
Together, the numeric portion and the letter portion of the tax code determine the specific allowances, deductions, and tax thresholds that apply to your income.
But what are some of the most common letters that can be featured in your tax code besides L? You can find them below!
L - Standard tax code
This is the default tax code assigned to individuals who have no special circumstances affecting their tax obligations. It indicates that you are entitled to the standard tax allowances and deductions.
BR - Basic Rate tax code
This code is used when you have income from multiple sources or when your total income exceeds the basic rate tax threshold. It means that all your income will be taxed at the basic rate.
D0 - Higher Rate tax code
If you have a D0 tax code, it signifies that all your income will be taxed at the higher rate. This usually applies to individuals with multiple sources of income that exceed the higher rate tax threshold.
D1 - Additional Rate tax code
Individuals assigned a D1 tax code have all their income subject to the additional rate of tax. This applies when your income exceeds the additional rate tax threshold.
E - Emergency tax code
This temporary code is used when your employer or pension provider doesn't have all the necessary information about your tax status. It means that you will be taxed at a higher rate until your tax situation is clarified.
NT - No Tax tax code
The NT tax code indicates that no tax should be deducted from your income. This is usually applicable to individuals who have certain types of income that are exempt from tax, such as some state benefits.
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