Tax can be notoriously difficult for individuals and businesses alike to understand. Given the numerous allowances, codes, credits, exemptions and reliefs within a wide array of tax categories, the rules and regulations can occasionally appear exceedingly intricate and complex.
Recognising the issues people often have with their personal tax, HMRC has recently launched a new tool to help taxpayers with Income Tax. In particular, the tool lets you check what your tax code means – the numbers and letters that appear on your payslips, P45 and P60 forms and, if you are self-employed, your tax returns.
Tax codes are used by HMRC to inform employers, taxpayers and other relevant parties of an individual’s Income Tax allowance and bands.
Codes are usually made up of three or four numbers and a letter. The numbers relate to your Personal Allowance, or the amount you are allowed to earn in that tax year without paying Income Tax. Multiplying the numbers in your tax code by 10 will tell your tax-free allowance.
The letters are a code for personal circumstances which affect personal allowances and tax rates.
For example, the most common tax code at present is 1257L. This refers to the standard Personal Allowance of £12,570, with L being a code that indicates that the individual is entitled to that allowance, and that income above that is to be taxed at basic, higher and additional rates, depending on how much they earn.
It’s often the letter codes that confuse people. BR, for example, means that tax is to be deducted from all income at the basic rate, and is used on second jobs and pensions. M and N appear when spouses transfer some or all of their personal allowance to one another. There are lots of different letters used, and nobody would be expected to know or remember them all. That’s where the new online tool comes in.
Checking you are on the right tax code
Beyond checking what the codes mean, the new tool also tells you how much tax you will pay, and helps check that you are on the right code.
To use the new tool, you need the following:
- Your latest tax code – usually located on your recent payslip, P60 or a P45.
- Your annual income before deductions
- Details of any company benefits
- State pension income, if you are receiving any.
After calculating your estimated annual income tax and explaining your tax code, the tool also provides links to change your tax code if you need that. However, despite this welcome help, the process of trying to change your tax code can still be a confusing experience.
Should you need further help, our tax team can help explain the specifics behind your individual tax code and then, if need be, assist in requesting an updated tax code from HMRC on your behalf.