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Tax Codes: How are they used?

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Tax codes what your employer uses to work out how much tax to deduct from your pay. It is calculated by HM Revenue and Customs and sent to the company you work for. Tax codes are usually made up of three numbers and a letter and most people born after 5th April 1948, with one job, will have the code 944L for the 2013 to 2014 tax year.

How are tax codes used?

If you get income from more than one employer, then each will usually issue you with a different code to ensure you get your tax-free personal allowance and pay the right amount over the course of a year. The code doesn’t tell employers how much you earn, only how much tax they need to take from their payments to you.

You can find your code on your payslips, P45, P60 or a PAYE Coding Notice.

What do the numbers in my tax code mean?

The numbers in it tell your employer how much tax-free income you get in that year based on your tax-free personal allowance – that is an amount everyone is allowed to earn before paying tax.

Income that you haven’t paid tax on (such as untaxed interest or part-time earnings) and the value of benefits from your jobs, such as a company car, are added up.

This is taken away from your allowance and what’s left is the tax-free income you are allowed in a tax year. The amount is divided by 10 and added to the letter for your circumstances.

confused about tax codesIncome tax rates- how are they calculated?

The rates of Income Tax you pay depend on how much taxable income you have above your personal allowance.

The amount of personal allowance tends to vary year on year and is currently £9,440 for anyone born after April 5, 1948.

So what do the letters in your tax code mean?

Most people have the letter ‘L’, which means they are entitled to the basic tax-free personal allowance. Other less common letters include ‘P’ for people born between 1938 and 1948, ‘Y’ for those born before 1938 and ‘T’ if your tax code includes other calculations to work out your personal allowance. This could apply if you earn over a certain amount.

Tax codes with a ‘K’ at the beginning mean you have income that isn’t being taxed any other way which is above your tax-free allowance.

For most people this happens when they are paying tax you owe from a previous year, getting state benefits that you need to pay tax on, or receiving work benefits that you need to pay tax on, such as a company car or health insurance.

Why has my tax code changed?

Your tax code may change if you start or stop getting things like benefits from your job, work expenses that you can reclaim tax for, income that isn’t being taxed or certain state benefits. If you change jobs you may be put on an emergency tax code.

You or your employer must inform HMRC about the change and it will work out what to do with your code. Once your employer has the new code they can work out how much tax to take from your payments the next time your wages are due and you will get a PAYE Coding Notice explaining the changes.

For more information regarding your tax code visit HMRC

 

 

 

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