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What Does Your Tax Code Mean?

Foreign_TaxAgility Accountants LondonDoes your tax code look like a foreign language to you? We thought it may be useful to explain in simple terms how you can understand what your tax code means and how you can work out what your tax-free personal allowance is.

So, what is a tax code? Your tax code is a short code worked out by HMRC that’s then sent over to your employer or pensions provider so to ensure the correct amount of income tax (PAYE), or other taxes, are taken from your salary or pension each month.

Where to Find Your Tax Code

If you’re unsure of your current tax code you can find it in a number of places, most significantly on:

  • Every payslip from your employer or pensions provider (use your most recent payslip code).
  • The P45 you received from your employer at the end of the last tax year.
  • A PAYE coding notice directly from HMRC.
  • The P45 from your previous job.

What Your Tax Code Means

The letters and numbers within your tax code all mean a different thing, with each of them helping your employer or pensions provider to work out how much tax they must set aside from your wages or pension before handing you the remainder.

The most common letters used within tax codes are:

  • L — you qualify for the standard tax-free personal allowance.
  • P — same as L, except you were born between 6 April 1938 and 5 April 1948.
  • Y — same as L and P, except you were born before 6 April 1938.
  • T — your tax code has to include several calculations to decide your personal allowance.
  • K — you have untaxed income that’s worth more than your tax-free personal allowance.

Other common tax code letters are explained in detail here, alongside information on the emergency tax codes.

The numbers in your tax code indicate how much tax-free income you’re qualified for in the current tax year. For most of us, this will start at the current tax-free personal allowance of £9,440 (or the equivalents for those born before 5 April 1948). Reductions are made in your allowance for any income you haven’t paid tax on, such as income from a part time job, interest that has yet to be taxed, and employee benefits such as a company car or an expensive gym membership (note that the number in your code represents something else if you have a K in your tax code; see example below).

This number is then divided by ten and placed beside your tax code letter to form a complete tax code.

An Example of Tax Codes in Practise

An example of a standard employee tax code with no personal allowance deductions would be 944L. In this example, the employee qualifies for the full standard tax-free personal allowance and is born after 5 April 1948.

The number 944 represents their tax-free personal allowance divided by ten; meaning their actual personal allowance for this year would be £9,449, as you must add nine to your tax code number once you multiply it by ten.

An example of a K tax code could be K944, whereby due to the fact that you have untaxed income that’s worth more than your tax-free personal allowance, the number beside the K in your tax code is added, rather than deducted from your taxable income, meaning in this example that you’d be taxed on your entire income from the job you received this particular tax code from, plus £9,449.

Your Personal Allowance for this year

Your Personal Allowances are linked to your age and change each year. For the current 2013/14 year, the personal allowances are:

  • Born after 5 April 1948: £9,440 (this increases to £10,000 in the 2014/15 year starting on 6 April 2014)
  • Born between 6 April 1938 and 5 April 1948: £10,500
  • Born before 6 April 1938: £10,660

Understanding Tax Codes

To speak with a professional to discuss either your tax codes, or the codes of your employees, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

 

This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

 

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