It may seem like a person’s tax code is just a random assortment of letters and numbers, but if someone has been assigned the wrong tax code, they may be paying more than taxes as necessary. Every salaried person, whether working full-time or part-time or receiving a private pension, is assigned a tax code. The tax code tells an employer or pension organization how much tax must be deducted from a person’s gross salary before it is paid. A tax code is simply a series of numbers and letters such as 1257L, S1257L, C1257L, BR and K497.
The figures represent the personal allowance rate which is currently set at £12,570 and is the non-taxable income people receive in the tax year.
However, this figure starts to decrease once a person’s income exceeds £100,000.
A person’s allowance will then decrease by £1 for every £2 they earn over £100,000, meaning that a person’s personal allowance will be zero if their income is £125,140 or more.
Personal Allowance applies in all four UK countries, although the tax brackets vary.
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The letters relate to a taxpayer’s situation and how it affects the personal allowance. Tax codes begin with an “S” in Scotland and a “C” in Wales.
The most common tax code in the UK is 1257L, as it is used for most people in PAYE employment and with no untaxed income, unpaid tax or taxable benefit.
The following letters in a tax code all mean different things:
L – Basic personal allowance for a person born after April 5, 1948
0T – No personal abatement
BR – All income from this source is taxed at the basic rate
DO – All income from this source is taxed at the highest rate
D1 – All income from this source is taxed at the additional rate
K – Total deductions exceed their allowances
M – Marriage allowance receiving 10% of the personal allowance of their spouse or civil partner
N – Marriage Allowance providing 10% of their unused personal allowance to their spouse or civil partner
NT – No tax is due on this income
C – Paying income tax in Wales
S – Pay the Scottish rate of income tax in Scotland
T – The tax office should review the tax code or keep personal data confidential
W1 or M1 – Emergency tax codes for the first week or first month depending on when a person is paid.
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If a person has tax code 1257L and earns £27,000 a year, the amount of income that will be taxed will be £14,430.
There may be other amounts to add to a personal allowance to increase the amount people can earn before paying tax.
This may be because a person may be entitled to other allowances, such as Blind Person’s Allowance, or be entitled to claim tax relief for business expenses, such as the use of a car personal for professional or professional subscriptions.
Several situations can lead to the assignment of the wrong tax code.
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This could be because a person has changed jobs, their benefits have changed, or a person’s benefits have changed.
Personal tax codes can also be found on a person’s payslip, on their P45 if they recently left a job, on their P60 at the end of a tax year, or in a tax code letter from the HMRC.
When checking their tax code, a person will need to ensure that the coded letters correctly represent their financial situation.
If not, someone should contact HMRC as soon as possible to sort out the problem.
In 2021, former Chancellor Rishi Sunak increased the personal allowance threshold by £70 from £12,500 to £12,570.
He then announced that it was to remain frozen at this level until 2026.
This means that although wages increase over time, either due to inflation or otherwise, the threshold will remain the same, it will not even increase in line with inflation.
This will result in individuals paying more tax over time, as the basic rate taxpayer will be pushed into the higher rate bracket.