At the beginning of a new financial year, we find ourselves trying to start off on the right foot and ensure our tax affairs are in order. We do this to avoid any nasty surprises at year end or, when HMRC reconcile our PAYE records. One thing we need to ensure is correct is our Pay As You Earn (PAYE) tax code.
Tax Codes Explained – What your tax code means
In short, a tax code is a series of letters and numbers that tell HMRC the amount of tax you should be paying each year, something that is not as scary as it may first seem. Most individuals who pay tax in the UK are entitled to a tax-free personal allowance. For the 2023/24 Tax Year this is £12,570 per annum. Therefore, the most common tax code would be ‘1257L’ indicating your entitlement to a full personal allowance. However, there may be some items included in your tax code that reduce the amount of tax-free income you are entitled to for the year. Some examples of these are:
- The receipt of a state pension.
- Benefits in Kind provided by your employer such as a company car or private medical insurance that have not been taxed through the payroll.
- The receipt of income that cannot be taxed prior to you receiving it, for example savings interest on which tax is due.
Alongside the numbers in your tax code, letters are used to set out additional information to The Revenue or your employer in relation to your tax-free entitlement for the year.
Common Tax Code Letters are:
- L – This is the most common letter to be applied to a tax code. This shows that you are entitled to the full standard tax-free personal allowance for the year. For the 2023/24 Tax Year this is £12,570.
Note : if your personal allowances are reduced to nil you will be given a code 0T
- S – The prefix letter ‘S’ shows that you are a Scottish rate taxpayer.
- C – the prefix letter C shows that you are a Welsh taxpayer and tells your employer or pension payer to apply the Welsh income tax rates.
- K – Items that reduce your tax-free allowances below zero, result in ‘minus allowances’. When this happens, HMRC treat these minus allowances as extra income on which tax is due, and they use a special code number, beginning with the letter ‘K’.
- W1, M1, X – Any of these letters mean you are on an emergency tax code These are commonly used when you start a new job. If you see a X rather than a W/M, this indicates your pay period is not weekly/monthly. You could be paid four-weekly for example. In these situations, PAYE is operated non-cumulatively. This means that you do not get the benefit of your unused personal allowance from the start of the tax year.
- BR/SBR/CBR – stands for basic rate – 20% in 2023/24. HMRC usually use this code for a second employment or pension where there is no tax-free amount available to reduce your tax deductions, because the tax-free allowance is allocated against your main employment or pension. SBR, is used in a similar way to BR, but will only be used where income is projected to be lower than the Scottish intermediate rate.
- D0/SD0/CD0 – Your employer (or pension provider) uses this code if HMRC expect all income from that employment (or pension) to be taxable at 40% (rest of the UK taxpayers rates)– the higher rate. You may have a D0 code if you have two jobs (or pensions), the main one of which fully uses your tax-free allowances and 20% tax rate band. HMRC will apply a D0 code against your second job (or pension) to make sure that you do not underpay tax. For Scottish taxpayers, this code applied to your income at the Scottish intermediate rate of 21% on (£25,869 to £43,682)
- SD1 – This code applies to your income the Scottish higher rate of 42% on (£43,663 to £125,140).
- NT – This code means no tax will be deducted from your income. This may be because; you are not resident in the UK or, you have arranged with HMRC to pay the tax on this income by another method.
So, what checks should you be carrying out to ensure your tax code is correct for 2023/24?
- Ensure all the employment and pension income included in your tax code is what you expect to receive in that tax year.
- Make sure all of your Benefits in Kind, that are not taxed through your employer’s payroll, are included in your code.
If you have any questions regarding your coding notice for the 2023/24 Tax Year or how to rectify an issue you have already spotted in your tax code we are here to help. Please do not hesitate to get in contact with Alison Hirst or your usual Sagars Contact.