A tax code warning has been issued. The minefield of tax codes can leave the average worker feeling overwhelmed and at risk of losing money, with recent figures indicating only a fraction of people are aware of what their tax code actually means. Your tax code directly affects the amount of income tax coming out of your pay packet, and slipping up could either see you forking out excess cash or underpaying and facing an unexpected bill later on.
Digital PR Lab’s workplace guru Sophie Rhone is urging all UK workers to scrutinise their tax code frequently to dodge errors that might lighten their wallets.
Sophie said: “It’s crucial to keep a close watch on your tax code and understand what it means for your financial management. Errors can occur, but by being proactive and well-informed, you can spot these mistakes early, prevent surprise bills, and make sure you’re not overpaying.”
Understanding your tax code
Understanding your tax code is crucial to ensuring you’re paying the right amount of income tax. A tax code, made up of letters and numbers, indicates your tax-free income allowance for the year.
For example, the “1257L” code for the 2023-24 tax year signifies a Personal Allowance of £12,570.
Here are some typical tax codes and what they mean:
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1257L: This is the default tax code for the majority of taxpayers
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BR : All income with this code is taxed at the basic rate, which is currently 20%
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D0: This code means all income is taxed at the higher rate of 40%
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0T: Used when no tax-free personal allowance is granted, possibly because it’s been fully used or there’s no P45 for a new employment
To check your tax code:
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Look at Your Payslip: It should be listed on your payslip. Ensure it matches the one given at the start of the tax year or after a job change.
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Examine Your P45/P60 Forms: Your P45 from a previous job will have your tax code, as will your P60 form, showing the code for the past tax year.
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Use the Government’s Online Service: Check your current tax code and its meaning through your personal tax account on GOV. UK.
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Contact HMRC: If in doubt about your tax code’s accuracy, get in touch with HMRC for clarification and correction if needed.
Why your tax code might be wrong
Having multiple jobs or pensions: If you have more than one source of income, tax miscalculations may occur if HMRC doesn’t distribute the correct allowances across them.
Employer errors: Employers could mistakenly report incorrect data to HMRC, leading to wrong codes.
Life changes: Changes in your life such as getting married, moving house, or changing jobs can alter your tax status. It’s important to inform HMRC promptly to prevent coding mistakes.
Benefits in kind: Non-cash benefits like a company car should be included in your tax code. Not accounting for these can result in under- or overpayment.
How mistakes impact employees
Overpayment: If your tax code results in an excessive amount of tax being deducted, you might end up with a smaller paycheck and could face financial difficulties until you reclaim the excess tax.
Underpayment: An incorrect tax code could mean you’re not paying enough tax, which could lead to an unexpected bill from HMRC later on, potentially with interest and penalties added.
Reduced take-home pay: Incorrect deductions can decrease your disposable income, affecting your ability to manage expenses or save.
What to do if your tax code is incorrect
Correct your details: Get in touch with HMRC to provide updated personal or financial information.
Claim a refund: If you’ve overpaid, you can apply for a refund.
Plan for a repayment schedule: If you’ve underpaid, discuss a manageable repayment plan with HMRC.
