It's a simple thing to do but many of us probably don't check whether our tax code is correct as often as we should do. Yet, with the cost of living crisis showing no signs of easing up, now is as good a time as any to do it - as it could see you owed thousands of pounds.
It may not seem important, but a simple visit to Money Saving Expert's 'Tax Code Guide & Calculator' could reveal whether you have been overpaying or underpaying on your tax. Legally, it's up to you to check your tax code's right.
Get it wrong and you can be underpaying £100s or £1,000s, and years later find you're hit with an unaffordable tax bill. Or overpaying, so missing out on money you could have now.
One woman, known on the website as Michele, discovered she was owed £9,400 following a check of her tax code. In an email to Money Saving Expert, she wrote: "I checked my tax code and discovered I was being taxed on every penny I earned.
"I'd previously been self-employed, but my code hadn't been updated with my employer. It took an hour on the phone to HM Revenue & Customs, but I've now been refunded £9,400."
So, how can you check your tax code? And how will you know if you're entitled to some extra cash you may not have known about?
What is a tax code?
A tax code is simply a series of numbers and letters, for example 1257L, S1257L, C1257L, BR, and K497. If you're a full or part-time employee, or receive a private pension, these hieroglyphics are used by your employer(s) or pension providers to calculate the amount of tax that should be deducted from your wages or pension before it's paid into your bank account.
This is known as the pay-as-you-earn (PAYE) system, though not everyone is taxed in this way. You won't have a tax code if you're fully self-employed, unemployed or you only receive the state pension.
How do I find my tax code?
Each income you have (jobs, private pensions) will have a different tax code. Remember to check them all. Here are the best places to look for your tax code(s).
- Payslip - Ask your employer if you can't locate your most recent one.
- PAYE coding notice (or P2) - Sent around January to March, before the start of the tax year. It explains how your code was generated.
- P45 - The form your employer gives you when you stop working for the company - and the one you give to your new employer when you change jobs.
- P60 - An annual summary of your salary and the tax that's been deducted.
- Pension advice slip - If you're receiving a private pension, the easiest place to find your code will be on any pension advice slip or on your P60 sent once a year.
- HMRC - You can check your tax code with HMRC online.
Numbers show the amount you can earn tax-free
You need to add a zero to get the real number, so 1257 means you can earn £12,570 a year tax-free – that's the amount you can earn in a year before your employer needs to deduct tax. This is called your personal allowance.
The size of this allowance depends on your income and whether there are any deductions (for example, benefits at work such as a company car, discounted rent or medical insurance) or additions (such as working-from-home tax relief).
Above this allowance, you pay tax on income, though the amount you pay depends on your total earnings (see current tax rates).
What the letters in your tax code mean
- L - You're entitled to a tax-free personal allowance. For those earning under £100,000 with no taxable perks (such as a company car) this should be "12,570 for 2022/23.
- 0T (or S0T or C0T) - You're not entitled to any tax-free personal allowance and all income is taxed in line with income tax bands. It's often a code you're put on when your employer doesn't have enough information about your previous employment, or you earn more than £125,140.
- BR (or SBR or CBR) - You're entitled to any tax-free personal allowance on income from this job or pension and pay 20% basic-rate tax on the whole amount. This is often used for a second job or pension, as it assumes your personal allowance is used on your main income.
- D0 (or SD0 or CD0) - You're not entitled to any tax-free personal allowance and all income is taxed at the 40% higher rate. This is often used for a second job or pension.
- D1 (or SD1 or CD1) - You're entitled to any tax-free personal allowance and all income is taxed at the 45% additional rate. This is often used for a second job or pension.
- SD2 - This is only used in Scotland and shows you're not entitled to any tax-free personal allowance and all income is taxed at the 46% Scottish top rate. Again, it's often used for a second job or pension.
- K - Your personal allowance has been eroded down to less than nothing, meaning the number after the K is actually a negative personal allowance. This can happen if you have income that isn't being taxed another way and is worth more than your personal allowance, such as paying back tax from a previous year, or getting work benefits that you have to pay tax on.
- M or N - You'll have this at the end of your tax code if you or your spouse/civil partner have received (M) or given (N) the marriage tax allowance. This allows non-taxpayers to transfer £1,260 of their personal allowance to their basic-rate tax-paying spouse or civil partner.
- NT - No tax is paid on this employment or pension income.
- T - If a T follows a number that isn't zero, it means you do get a personal allowance, which is dictated by that number. However, it also means your tax affairs need to be reviewed by HMRC, which is typically happens if they're complex.
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