Oh tax codes! How I hated them when I started training to be a tax consultant. They can be tricky little things. If you are wrong, the consequences can be quite serious. Your client could end up overpaying, or worse, underpaying, and at the end of the year, end up with a large tax bill. As you can probably imagine, that customer is not going to be a happy bunny.
I am a trainee tax consultant working in a small tax consultancy near London. Having come to London from Germany 8 years ago for a gap year adventure, I couldn’t have imagined that I would one day end up becoming a UK tax consultant. Nowadays, I can’t imagine a better job for me.
For most of us, having the wrong tax code means we end up paying too much tax. You have probably heard or been warned about the dangers of having an emergency tax code. Guess what? The emergency tax code (1000L in 2014/15) is the code most of us have to make sure we pay the correct amount of tax.
A tax code tells your employer how much money you can earn tax-free each year so they can deduct the correct amount of tax from your pay. For most of us, this will just be our basic personal allowance, which is £10,000 for the 2014/15 financial year. The tax code itself is your tax-free earnings divided by ten and followed by a letter (mainly “L”), hence the 1000L tax code. Unless you have extra earnings or nontaxable income, this code will ensure that you get your full personal allowance and that approximately the correct amount of tax is deducted from your pay.
So what are the “dangerous codes” to watch out for? Basically, any code other than 1000L requires proper verification. I have listed some of the most common below:
1000L W1/M1
W1/ M1 means week 1/month 1. Normally, your tax position is recalculated each time you get paid based on your total income for the year to ensure you receive your full personal allowance over the course of a tax year. However, if his employer uses a W1/M1 code, he does not have enough information about his earnings before he started working to calculate his personal allowance for the remaining tax year. Instead, you are given 1/12 or 1/52 of your personal allowance (depending on whether you are paid monthly or weekly). However, this may not give you your full personal allowance if, for example, you had lower or no income before you started working and you may end up paying too much tax.
The W1/M1 code is intended to be temporary and must be changed by HMRC. However, if this does not happen, you can call the HMRC tax helpline (tel: 0300 200 3300) and ask for it to be changed.
0T
If your tax code is 0T, alarm bells should sound. Your employer will use this tax code if you do not complete an initial return before starting your job.
When you start a new job, under certain circumstances, your employer may ask you to make a start statement to find out if you had any employment income or benefits before you started your job or if you have another job.
The 0T code will not give you any personal allowance and will deduct taxes at the respective tax rates. If you have such a code you will almost inevitably be overtaxed and you should call HMRC to request that it be changed as soon as possible.
BR, D0 or D1
You will most likely come across a BR code. This code discounts taxes at a rate of 20% (D0 discounts taxes at 40% and D1 at 45%). If you have a second job, this job probably has a BR code with the code 1000L assigned to your main job. However, if you earn less than £10,000 per year in your main job, code 1000L will not give you your full personal allowance. The unused portion of the allowance should be transferred to your second tax code, otherwise you’ll end up overpaying tax.
other codes
Sometimes tax codes can be more complicated, for example, if you have other untaxed income, are entitled to a higher personal allowance, receive benefits from your employer (for example, private health insurance or a company car) or incur labor expenses. Your tax code must contain all of your untaxed income and allowances for the correct amount of tax to be deducted. If you are unsure if your tax code is correct, you may wish to seek advice from HMRC on the tax helpline.
Where can you find your tax code?
You may have received a tax coding notice from HMRC before the start of the tax year. However, not everyone gets that notice. If you recently stopped working and received a P45 form from your employer, you will find your tax code on that form. (An employer must provide a P45 to any employee who has stopped working for them.) Alternatively, you can call the HMRC tax helpline to find out.
If you had an incorrect tax code in the past
The standard tax codes in the last 4 fiscal years were as follows:
2010/11: 647L
2011/12: 747L
2012/13: 810L
2013/14: 944L
If you are concerned that you have overpaid taxes in the past due to an incorrect tax code, you can file a claim for a tax refund for up to the last 4 years.
It’s been a year since I started working in taxes and I’m still not a big fan of those tax codes. Fortunately for most of us, though, our tax codes are likely to be pretty straightforward. However, they are worth checking as if they are incorrect, you may end up paying the wrong amount of tax. And who knows, you may find that you have overpaid taxes and can claim a refund.