You could potentially lose thousands of pounds by being in the wrong tax code - so what should you be looking out for?
Every year, millions of pounds are lost due to tax code errors as many people in the UK are unaware of what their tax code actually means.
In fact, online search analysis collected by Moneyzine, shows that the question “what does my tax code mean” was recently the highest it’s ever been in the last five years.
Tax codes are assigned by HMRC based on the information they have about someone's income.
Jonathan Merry, financial expert and CEO of Moneyzine explains that “it’s absolutely essential” that everyone checks their tax code.
It is possible for your tax code info to be inaccurate or out-of-date without you realising it which would result in incorrect taxes being taken from wages and pensions.
Jonathon highlights that it is not actually HMRC's or your workplace's responsibility to check if the code is correct - tax codes must be checked by the person they apply to - so the responsibility is yours.
He explained: "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.
Firstly, you can simply check your payslip, a P45 if you have recently left a job or a P60 if it is the end of a tax year - you can also find your tax code online at Gov.uk.
In order to make sure your tax code is correct, you should be aware of what the different tax codes are.
Have you managed to claim back £1,000s from HMRC? Let us know: mirror.money.saving@mirror.co.uk
A tax code is simply a series of numbers and letters and the most common tax code is 1257L, which means you apply for the standard £12,570 tax-free allowance and have one source of income.
The numbers represent how much you earn tax free, which is just the personal allowance and the letters relate to a taxpayer's situation and how it alters the personal allowance.
Tax codes start with an “S” in Scotland and a “C” in Wales.
Most common letters that can be featured in the tax codes:
- 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 individuals are entitled to the standard tax allowances and deductions.
- BR - Basic Rate tax code: This code is used when someone has income from multiple sources or when their total income exceeds the basic rate tax threshold. It means that all their income will be taxed at the basic rate.
- D0 - Higher Rate tax code: If someone has a D0 tax code, it signifies that all their income will be taxed at a 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 their income exceeds the additional rate tax threshold.
- E - Emergency tax code: This temporary code is used when someone’s employer or pension provider doesn't have all the necessary information about their tax status. It means that people will be taxed at a higher rate until their tax situation is clarified.
- NT - No Tax tax code: The NT tax code indicates that no tax should be deducted from one’s income. This is usually applied to individuals who have certain types of income that are exempt from tax, such as some state benefits.
Jonathon says if you think something may be wrong with your code, you need to contact HMRC as soon as possible so they can update it accordingly.
If you are paying too much, you may be able to get the money back.
However, if you have underpaid tax you will need to pay it back to HMRC - it is better to sort this out sooner rather than later to avoid having to pay back a larger sum.
