5 What’s the right tax code?
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, 1257L.
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 £12,570 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 your new employer or to HMRC if you are not going to work again in that tax year.
The table sets out the alternative letters used by HMRC in their tax coding.
|You are entitled to the standard tax-free personal allowance
|M and N
|These relate to additional marriage allowances some people are eligible for
|For an employee whose main home is in Scotland
|For an employee whose main home is in Wales
|This code applies when the computation of tax due is made more complicated – for example by earning a very high income
|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
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
|All your income is taxed at the basic rate of tax (20% in 2023/24) – normally applies if you have a pension or more than one job
|All your income is taxed at the higher rate of Income Tax (40% in 2023/24) – normally applies if you have a pension or more than one job
|All your income is taxed at the additional rate of tax (45% in 2023/24) – normally applies if you have a pension or more than one job
|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 and X
These are emergency tax codes (M1 if you are paid monthly, W1 if you are paid weekly, X for others). 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
If you do have a job, find the tax code on your most recent pay slip and check it against the information above. If you don’t have a job, ask a friend or family member if you can look at their payslip.
What personal allowance is indicated? Use the information above to help work out the allowance being given to you.
Make a record of the code. Do you think it’s correct? If you think it is not correct, what are you going to do about it?
- If the personal allowance is less than the normal personal allowance for the year you should check why this is the case.
- If you’re coded OT, W1 or M1 then you should take action to ensure that your employer has your P45 form from your previous employment. This will ensure that you’re given a normal tax code and this, in turn, will ensure that you’re refunded if you’ve been paying too much Income Tax due to the application of an emergency tax code.
- If at the end of the tax year you believe you’ve paid too much tax you should contact HMRC – preferably in writing – setting out your grounds for a refund. The tax office you need to contact is the one that deals with your employer. The pay slip provided by your employer might tell you which tax office is the relevant one. Alternatively you can track down the right office online.
- Keep a record of your tax code and other taxation details.