Managing my money for young adults
Managing my money for young adults

This free course is available to start right now. Review the full course description and key learning outcomes and create an account and enrol if you want a free statement of participation.

Free course

Managing my money for young adults

5 What’s the right tax code?

Described image
Figure 4

Understanding how Income Tax is deducted is important, but you also need to keep an eye on your tax code. This code determines how much Income Tax you pay. You will find it on every pay slip.

The code comprises four numbers and a letter – for example, 1150L.

The numbers define your tax-free allowance. You simply add a zero (0) to the end of the number, so in the example above your personal allowance would be £11,500 for the tax year.

The letter in the code defines the nature of your income. L is the most common letter in tax codes as it applies to most people who have just one job – be it full time or part time.

There are two tax forms that you will become familiar with in your working life:

  • P60 the annual statement of income and deductions provided to you by your employer. You will normally receive this within two months of the end of each tax year (5 April)
  • P45 the statement of income paid and tax deducted for the year when you leave a job (called the ‘prevailing tax year’). This form needs to be passed to HMRC.

The table sets out the alternative letters used by HMRC in their tax coding.

Table 1 The different tax codes

L You are entitled to the standard tax-free personal allowance
M and N These relate to additional marriage allowances some people are eligible for
S For an employee whose main home is in Scotland
T This code applies when the computation of tax due is made more complicated – for example by earning a very high income
0T Either your personal allowance has been used up (e.g. by being applied against another source of income) or you have started a new job and you don’t have a P45 form (see above) or your employer has insufficient details to give you your tax code
K

This code applies if deductions due to having company benefits (for example a company car) or having a state pension or for tax due from a previous tax year exceed the total amount of the personal allowance

BR All your income is taxed at the basic rate of tax (20% in 2017/18) – normally applies if you have a pension or more than one job
D0 All your income is taxed at the higher rate of Income Tax (40% in 2017/18) – normally applies if you have a pension or more than one job
D1 All your income is taxed at the additional rate of tax (45% in 2017/18) – normally applies if you have a pension or more than one job
NT This code applies if you are paying no tax on your income. It applies to those in some categories of self-employment
W1 and M1

These are emergency tax codes (M! if you are paid monthly, W1 if you are paid weekly). This means the tax is calculated only on the income earned in the current pay period, rather than an assessment of what you will earn on a full year.

Emergency tax codes are usually updated automatically after you have given your employer your P45 (see above). You will always start a new tax year with a normal tax code, not an emergency one.

Activity 4  Working out your tax code and personal allowance

By signing in and enrolling on this course you can view and complete all activities within the course, track your progress in My OpenLearn. and when you have completed a course, you can download and print a free Statement of Participation - which you can use to demonstrate your learning.

Click on 'SIGN IN to enrol' to get started.

You can find out more about registering and OpenLearn in our FAQs.
MMMYA_1

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has over 40 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to university level study, find out more about the types of qualifications we offer, including our entry level Access courses and Certificates.

Not ready for University study then browse over 900 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus