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A tax code is created by HM Revenue & Customs using numbers and a letter. This tax code is sent to your pension provider or your employer to enable them to calculate how much tax to take from your earnings or pension. However, if the tax code is incorrect, you will pay either too little or too much tax.

The numbers used in your tax code indicate the amount of taxable income you are allowed to receive before paying any income tax. For instance, 747L which is the basic tax code indicates personal allowances of 7475 during the year. The letter ‘L’ indicates basic personal allowances or an emergency tax code. In a number of instances an employer or pension provider may have to operate an emergency tax code, which is a temporary tax code. This may happen if you start a new job and don’t have a form P45 to hand in from your previous employer. The emergency tax code will ensure that you receive the correct amount of basic personal allowances each week until HMRC issue the correct tax code to your employer or pension provider.

The letter ‘P’ used in your tax code is for people who are aged between 65 and 74 and also entitled to full personal allowances. The letter ‘Y’ is for people aged 75 and over, who are eligible for full personal allowances.

Code BR means that you will pay tax at the basic rate, which is currently 20 percent. Code D0 will tax your income at 40 percent, which is the higher rate of tax and code D1 will deduct tax on your income at the 50 percent tax rate.

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