Tax codes explained

Tax codes need not be the enigma they sometimes appear.  They affect most people with jobs and yet are often wrong.

Codes which are wrong mean that the wrong tax will be taken from your pay.  It might be too much or too little – but neither situation is ideal.  Too little tax may be spotted later and a tax bill will arrive.  Losing too much tax and your back pocket suffers.

Worst of all if your tax code is wrong the mistake might persist for a very long time before HMRC picks it up.  For this reason employees should take a little interest in those funny numbers on their payslip in the ‘tax code’ box.

So what is a tax code?  It is a number (ending with one letter) which tells your employer how much tax to deduct from your pay each week or month.  The code is personal to you and may reflect aspects of your own domestic/financial circumstances.  It gives you allowances and sometimes takes things off them to tax things that might otherwise slip through the net.

Your employer is never told what your circumstances are, nor the details of how the elements of your tax code are made up. They are just told the code number to use with your pay. This means your private matters remain private.  It does however also mean that your wages department will not be able to explain how your code looks the way it does.  The best they can do is make an educated guess.

If your code has numbers at the start e.g. 747L then your tax-free allowances are basically that figure times 10.  The most common personal allowance for most people is £7,475 (2011/12 year).  Divide that by ten and you get the code 747L.  (Yes I know that if you multiply 747 x 10 you get £7,470.  The tax system makes up for that minor difference by adding £9 to the answer after multiplying by 10).

Most people have a code with numbers in it for their main job only.  In other words their main tax allowances are given to that one job.  For most people this will leave their tax correct at the end of the year.

If these typical people take up a second job then the employer should use a different code – BR. This BR code stands for Basic Rate.  And like it says on the tin, Basic Rate tax of 20% (2011/12 rate) should come off the pay at the second job.

For higher-rate taxpayers with additional employments the tax office may issue a different code again.  This time D0 is the main one.  The dee-zero code is not self-explanatory but means you lose 40% tax from all pay at that job.

Sometimes your code will change mid-year.  If this happens HMRC sends the basic code number to your work.  It then sends a detailed explanation to your home.  If your code changes and details are not sent to home it is an indication that HMRC is using an old address for you.  Ring them and have it changed.. Ask them to post out a copy of the code as you didn’t get it.

If you do not understand your code you should ask the tax office to explain it.

Codes can be a problem for people with two or more small jobs – say 2 jobs earning £2,000 per year at each. A person like that would lose tax even though their income at £4,000 is well below the tax threshold.  To avoid having to claim tax back each year you can ask the tax office to split your code.  That way they give some allowances to job 1 and the rest to job 2.  It’s unusual, but effective – and you only have to ask.

Queries about tax codes must always be put to the tax office. You can phone the office handling the payroll for your employer.  This number may be on your P60 or available at work from the pay office.  Failing that a good starting point is your nearest Local Enquiry Centre. Look under HM Revenue & Customs in the phone book. Or you can write to your tax office.  Email is as yet a bridge to far – the Revenue just doesn’t want to get that close to its customers!

Huston’s Hint

Don’t suffer in silence. Incorrect tax codes will cost you money every pay-day.  Make the tax office explain yours to you – in plain English.