New Tax Year, New Tax Code?

With the new tax year approaching and ever-changing income tax rates and allowances, there is an increased importance of ensuring your PAYE Tax Code is correct.  

PAYE AND TAX CODES

Every employee registered in an organisation’s payroll system will have a PAYE tax code issued by HMRC to their employer. The code determines the employee’s tax-free income for the tax year and is applied to their employment income to calculate their ‘take-home’ pay.  

WHY SHOULD I CHECK MY TAX CODE?

All taxpayers should ensure that their tax codes are as accurate as possible to avoid paying too much or too little income tax on their employment income throughout the tax year. 

Any extra tax owed to HMRC, or any repayments due to the taxpayer will be dealt with after the tax year or once their self-assessment tax return has been submitted, where the taxpayer is registered for self-assessment. 

Consequently, for cashflow purposes, it is worthwhile checking that you are paying the correct tax throughout the tax year rather than having an amount to pay later.
 

Scottish Tax Codes

Due to the growing divergence between Scottish income tax rates and the rest of the UK tax rates, it is also more important than ever for Scottish taxpayers to ensure they are on the correct tax code.  

Scottish employees who earn less than £28,867 will pay less tax than rest of the UK taxpayers and pay more tax if they earn more than this amount, therefore it is crucial that your tax code is correct. You should inform HMRC if you move to or from Scotland in order that your tax code can be updated accordingly. Further details with regards Scottish taxpayers can be found at this link [ https://aab.uk/private-clients/scottish-taxpayers/ ]. 

HOW TO CHECK YOUR TAX CODE AND WHAT IT MEANS

Where can I find my tax code?

Your tax code can be found on payslips issued by your employer, or if you have a Government Gateway account, you can access your tax code notices which provide a breakdown on how HMRC have calculated your tax code.

My tax code is 1257L, what does this mean?

1257L is the standard tax code for individuals with only one job or pension and requiring no other adjustments or restrictions. This code tells your employer that you are entitled to the full standard tax-free Personal Allowance of £12,570. 

Please note that if you are a Scottish taxpayer, your tax code should start with the letter ‘S’, therefore the Scottish equivalent is S1257L.
 

How are tax codes determined?
 

1. Personal Allowance

Tax codes are calculated by first taking the tax-free Personal Allowance that the individual is entitled to for the tax year. The standard Personal Allowance is currently £12,570 and has been frozen at this level until April 2028. 

Your Personal Allowance reduces by £1 for every £2 your total taxable income exceeds £100,000. Therefore, you will not be entitled to a Personal Allowance if your total taxable income exceeds £125,140. 

It is important that you estimate your total taxable income in advance of the next tax year to determine whether your Personal Allowance should be reduced in your tax code. 

If it is not reduced in your tax code, then you will be under-paying income tax at source and will be faced with an additional liability after the tax year.
 

2. Add additional relief 

HMRC will then add any additional relief you are entitled to such as relief on Gift Aid donations and personal pension contributions. 

These reliefs are typically estimated based on information from the previous tax year, therefore you need to make HMRC aware if these have significantly changed.  
 

3. Deduct company benefits or state benefits 

HMRC will deduct any company benefits (such as company cars and private medical insurance) or state benefits (such as state pension received) when calculating your tax code. 

Again, these figures will be estimated based on information from the previous tax year, therefore you need to make HMRC aware of any significant changes.  
 

4. Deduct untaxed income 

A deduction can also be made to your tax code for any income that does not have tax collected at source, such as property income, bank interest and dividends. However, HMRC will not deduct this automatically and it is the taxpayer’s choice if they wish for tax on this income to be collected via PAYE. 

What are the different tax codes?

The different letters included in tax codes are outlined as follows: 

Letters	What they mean
L	You’re entitled to the standard tax-free Personal Allowance (£12,570)
K	You have income that is not being taxed another way (e.g. benefits or other untaxed income) and it’s worth more than your tax-free allowance
M	You’ve received a transfer of 10% of your partner’s Personal Allowance
N	You’ve transferred 10% of your Personal Allowance to your partner
T	Includes other calculations to work out your Personal Allowance
0T	Your Personal Allowance has been used up, or you’ve started a new job, and your employer does not have the details they need to give you a tax code
NT	You’re not paying any tax on this income
S	Your income or pension is taxed using the rates in Scotland
C	Your income or pension is taxed using the rates in Wales

 

The following codes are usually used if you’ve got more than one job or pension: 

Letters	What they mean
BR	All your income from this job or pension is taxed at the basic rate
D0	All your income from this job or pension is taxed at the higher rate
D1	All your income from this job or pension is taxed at the additional rate

 

How do I know I’m on an emergency tax code?

Emergency tax codes will end in W1, M1 or X and may be as a result of commencing a new job, working for an employer after being self-employed or receiving company benefits or State Pension. 

This code will be temporary and will be updated once HMRC receive the correct details. However, if you have, or have had, an emergency tax code, you can expect to pay more tax on your employment income for the period in which the code applies. Any additional tax paid will be refunded by HMRC once the correct tax liability for the period has been established.  

HOW CAN AAB HELP?

We would encourage all taxpayers to check their tax codes, if they have one, to ensure that they are correct. However, if you are unsure whether your code is correct and require any assistance or have any queries, please get in touch with Michaela McCombie or your usual AAB contact.