Navigating the intricacies of tax codes can be a daunting task for many people. Your tax code determines how much income tax is deducted from your salary, and even a minor error could leave you paying more than you should or not enough, leading to huge unexpected tax bills later on. Workplace expert Sophie Rhone from Digital PR Lab advises people to check their tax code regularly to avoid ending up out of pocket.
A tax code comprises a combination of letters and numbers representing the amount of tax-free income you’re entitled to in a tax year. For example, the code “1257L” for the 2023-24 tax year signifies a Personal Allowance of £12,570 before paying tax on the remaining income. Common tax codes include 1257L for most taxpayers, BR indicating all income is taxed at the basic rate (20%), D0 for all income taxed at the higher rate (40%), and 0T indicating no tax-free personal allowance applies.
Your tax code is typically displayed on your payslip. It is essential to compare it to the code provided at the start of the tax year or when changing jobs. If you recently switched jobs, ensuring your P45 form displays the correct tax code is important. Your P60 form will also reflect the code used during the tax year. The UK government offers an online tool through your personal tax account to view your current tax code and understand its implications. If unsure of the accuracy of your tax code, contacting HMRC directly for investigation and adjustments is recommended.
Common reasons for incorrect tax codes include having multiple jobs/pensions leading to tax miscalculations, employer mistakes in reporting data to HMRC, life changes such as marriage or moving affecting tax status, and not accounting for non-cash benefits like a company car in the tax code. Incorrect deductions can result in either too much tax being withheld, leading to financial strain until reclaiming excess tax, or underpaying tax, resulting in a surprise bill from HMRC later.
If your tax code is wrong, correcting your details with HMRC, claiming a refund for overpayment, or planning a repayment schedule for underpaid tax are necessary steps. Sophie Rhone emphasises the importance of monitoring your tax code and understanding its implications for effective financial management. By staying proactive and informed, errors can be caught early, preventing unexpected bills and ensuring correct tax payments.