A tax code is very important as it is used by your employer or pension provider to determine how much tax is deducted from your pay or pension.
It isn’t unusual for a tax code to be incorrect, with the HM Revenue & Customs identifying millions of mistakes with individual’s tax codes every year. If your tax code is not correct, you could end up paying too much or too little tax. This could then either lead to an unexpected tax bill that you have to pay, or the situation where you are hundreds or thousands of pounds out of pocket.
Tax codes could differ from the standard tax code (944L in 2013/2014 tax year), due to an individual having more than one source of income, receiving employee benefits, being over 65 or receiving a pension.
If you pay tax through the PAYE system it is advisable to check what your tax code is, and see what it means, to ensure it is correct. Your tax code can be found on your payslip, P45, or a coding notice from the HMRC.
The most common personal allowance for the 2013/2014 tax year is 944L, which means you can earn £9,440 before you start paying tax.
Some examples of common tax codes are:
- L Code – applicable if you were born after 5th April 1948 and are entitled to the basic personal allowance
- K Code – applicable if you have company benefits, state benefits or tax to pay back from an earlier tax year
- T Code – if there are other items that need to be reviewed in your tax code
- BR Code – applicable if you have a second job or pension (all of income is taxed at basic rate)
- NT Code – no tax is taken from your income or pension
If you think there is an error in your tax code you should contact the HMRC as soon as possible and ask them to change it. This will avoid you owing more tax to the HMRC or being out of pocket.