Five Essential Tax Code Facts

The word ‘code’ is usually attached to the adjective ‘secret’, with connotations of spies, conspiracies and war heroes. In terms of both espionage and meaning, your tax code is just the opposite. You are supposed to understand what your tax code means. And, aside from those issued to actual MI5 and MI6 employees, there’s nothing secret service about it.

But what it lacks in excitement, your tax code makes up for in financial importance. If you’ve got the wrong one, you’re paying the wrong amount of income tax. And there are considerable consequences.

Paying too little means that you owe HMRC and it’s your responsibility to sort this out. Paying too much tax means that you’ll need to go through the tax rebate process to get it back. And there are maximum time deadlines on that.

Have a quick scan through these five essential tax code facts to make sure you’re up to speed.

Deciphering your tax code

It’s reported that 46% of taxpayers can’t read their own tax code. Each element of your tax code means something and none of it is ‘just for HMRC’. You need to know what it means so that you can check yours is correct.

On all tax codes, the number’s meaning is the same. The number in your tax code, multiplied by ten, is the amount of Personal Allowance you are entitled to for that tax year.

For example:

The most straightforward tax code for the 2019-20 tax year is 1250L.

1250 x 10 = 12,500

Personal Allowance = £12,500

A taxpayer with this code can earn up to £12,500 before they need to pay any income tax at all.

The L means that you have no special circumstances HMRC need to take into account.

You may have a different letter, or letters, in your tax code. The Tax Office need to be able to code all the different possible employment circumstances. We’ve got the full cipher explaining the different letters’ meanings in our tax code FAQs.

Unexpected changes to your tax code

HMRC may change your tax code if your situation changes. If they do, they’ll send you a letter in the post to explain why.

There are several reasons why HMRC might change your tax code for you. For example:

  • Your state pension or benefits are increased or decreased.
  • You owe tax from the previous tax year and are paying it back in increments through your tax code.
  • You’ve claimed a tax rebate for one tax year, so HMRC incorporates the same expenses into subsequent years’ tax codes. In other words, you don’t have to keep applying for the same tax relief because it’s already accounted for by HMRC and shown in your tax code.

If you have made a claim for work expenses you need to be careful that your tax code is not        updated in a way in which you will be underpaid at the end of the tax year. This is common          in circumstances where it’s not possible to incur the same value of expenses in the current          and future tax year. A good example would be a mechanic buying a tool box worth £5000            which he will not need to buy again anytime soon.

  • Any work benefits or expenses change.

Don’t just assume that HMRC have got it right (they are human). Once you’ve got your letter explaining your change of tax code, just check that it does match your circumstances. You also need to check if your tax code changes, but you have not received any letter from HMRC.

You can use your HMRC online personal tax account to find out what your tax code is if you don’t receive any correspondence from HMRC.

Does everyone have a tax code?

Everyone that is employed and paid through the PAYE has a tax code. Then you, HMRC and your employer can all make sure everything properly accounted for. But self employed people pay their taxes through the self assessment process and generally don’t need a tax code for themselves. The most recent figures show that 4.9million taxpayers are self employed, since March of 2019.

There are those in the more complex situation of being both employed and self employed. For example, you work for someone else, but also sell items you make on Etsy, or rent out a second property, or have your spare room on Airbnb. This separate second income is also liable to tax and isn’t part of your PAYE tax code situation. It needs to be declared through the self assessment system.

Balancing two or more income streams makes it harder to determine how much tax you owe HMRC altogether. So sometimes it’s wise to get help from a tax professional.

New side hustle and your tax free personal allowance

The internet has enabled people to earn money in new, interesting ways. For example, sponsored content on your blog, or being an influencer on social media. Lots of people who are adopting a similar type of side hustle are not full considering the tax implications of their brand new income stream.

HMRC’s figures show that people in the 18-24 age group are the least likely to have a firm grip on their tax position. At best, this means that you are probably missing out on tax reliefs and allowances. In a worst case scenario, you could rack up some serious debt to HMRC. This is largely down to lack of experience within the system.

Unfortunately, HMRC doesn’t have a hobby you’re earning a bit extra from category. If you’re making money from providing goods or services, it’s a business and you are liable to pay tax on those earnings.

Know what tax bracket you are in

Apparently only 20% of British taxpayers know the threshold for the higher levels of income tax. Your tax bracket affects how much Personal Allowance you are entitled to and your tax code. These tax bands usually changes every year and as announced by the Chancellor in the Annual Budget.

For example 2019-20:

  • 45% income tax charged on earnings over £150,000 – Additional Rate
  • 40% income tax charged on earnings between £50,001 and £150,000 – Higher Rate
  • 20% income tax charged on earnings between £12,501 and £50,000 – Basic Rate
  • 0% income tax charged on earnings under £12,500

Know your tax bracket.

 

Tony Shanks
Operations Director
Member of the ATT

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