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Tax Code and How it works
The amount of tax deducted from your salary, wage or pension is determined by the tax code. Therefore, to comprehensively understand your situation concerning tax contributions, you need to be familiar with tax codes, both in terms of what they are and what they signify for you individually, as well as the means through which issues concerning them can be resolved.
What is the tax code?
The tax code is the number that is used by HM Revenue and Customs to calculate how much income tax you should pay. It is unique to you, and it is calculated based on your personal circumstances. The tax office gives you a code when you start working, and it will remain the same until you stop working or switch jobs or your income changes. You should check your own tax code every year to make sure that the information held by HMRC about you is accurate. If there are any changes in your circumstances, such as starting or stopping work, changing jobs or getting married, then these may affect your new tax code. You can also request a change of tax code if there’s been an error made by HMRC.
Letters and numbers make up the entire tax code. For example, the number 1257 should show how much tax-free pay you are permitted to earn in each tax year. As a general rule of thumb, you need to multiply the number by 10 to obtain the total amount of income you may earn each year before it is liable for tax. Given that the personal allowance for the year 2022-23 is 12,570 pounds, the number for many employees is 1257. The letter explaining your tax code provides further detail to your employer about the allowances you are eligible for or the appropriate tax rate to apply.
One or more of the letters in your tax code might stand for any of the following:
L – Standard Personal Allowance
NT – No Tax Deductible
BR – All earnings are subject to a flat 20% tax rate, or the “base rate.”
K – Previous Year Adjustments of unpaid Tax
M – Your spouse has given you a Marriage Allowance equal to 10% of his or her Personal Allowance.
N – You have transferred 10% of your Personal Allowance
T – changes have been made to your Personal Allowance due to factors such as income beyond £100,000.
OT – Employer does not have access to your tax information.
D1 – The higher rate applies to your salary or pension income
If you’re self-employed and don’t expect to file any taxes, you won’t need a tax ID. Your self-assessment return is the means through which your income tax is determined.