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UK tax regulations are vital. Income, allowances, and deductions determine how much tax an individual should pay. So knowing your tax code might help you avoid overpaying or underpaying.
What is Tax Code?
HMRC uses tax codes to calculate tax payments. It depends on the person’s income and benefits. The tax code is usually a combination of numbers and letters. The number represents the individual’s tax-free allowance, and the letter represents any modifications to that amount. For example, the tax code 1250L grants a £12,500 tax-free allowance for the year. The letter “L” signifies the basic tax-free allowance without changes.
Different Tax Codes
UK tax codes suggest different allowances and modifications. Common UK tax codes include:
- 1250L: This is the most popular tax code in the UK, meaning you have a tax-free personal income of £12,500 for the year.
- BR: This tax number is used when you have more than one job or source of income, meaning that all of your income will be taxed at the basic rate of 20%.
- D0: This tax number is used when you have multiple jobs or sources of income, meaning that all of your income will be taxed at a higher rate of 40%.
- NT: This tax code is used when you don’t have to pay taxes because your income is below the tax-free personal allowance, or you qualify for tax exemptions.
- K: This tax code is used when you have income that is not taxed or is taxed at a different rate. You must pay an additional tax to meet any tax deficiency.
- S: This tax number is used if you qualify for the Scottish Rate of Income Tax, which is a different tax rate for income made in Scotland.
Your tax code may change each year based on your specific situation and tax law changes. To avoid overpaying taxes, check your tax code often. HMRC or a tax professional can help you understand your tax code.
Why should you know your Tax Code?
Understanding your tax code affects your tax bill. You may overpay or underpay taxes if you fail to understand your tax code. If your tax code is wrong, you may overpay. Conversely, you may pay too much income tax if your tax code is too low. Overpaying taxes might make it hard to make ends meet. However, a high tax code may result in underpayment. This can lead to an expensive tax bill at year’s end. In addition, underpaying taxes might result in heavy fines and penalties.
Checking Tax Code
Pay slips and P60s show tax codes. Your tax code should be on your payslip. Your company should issue you a P60 at the end of the tax year detailing your wages and tax paid.
What is P60?
A P60 shows your annual income and employer-deducted taxes. It covers the tax year from April 6 to April 5. By May 31, your employer must provide you with a P60 for the tax year. For your self-assessment tax return, tax credits, or mortgage or loan application, you’ll need your P60.
The P60 includes key income and tax information:
- Your gross salary before taxes and National Insurance payments.
- Your gross pay that is taxed is your total taxable compensation.
- The total tax withheld from your yearly salary is your total tax paid.
- National Insurance payments collected from your income.
Check your P60 thoroughly to verify accuracy. Then, contact your employer promptly to correct any inaccuracies. If your tax code is wrong, call HMRC immediately. They can check and change your tax code.
Can Tax Codes be changed?
HMRC could change your tax code for many reasons. Common reasons for changing your tax code are:
- Income changes: Your tax code may change to reflect your new earnings.
- Tax rate changes: Your tax code may change if tax rates or allowances change.
- Benefits or allowances: If you get new benefits like the Marriage Allowance or the Blind Person’s Allowance, your tax code may change.
- Employment changes: If you have a new job, your company will provide HMRC with your tax code, which may be changed.
Conclusion
Avoid overpaying or underpaying taxes by understanding your tax law. Income, allowances, and other variables determine your tax code. So check your payslip or P60 for your tax code; if it’s wrong, contact HMRC. Understanding your tax law helps you pay properly and prevent financial issues.