A tax code is usually made up of numbers and a letter and is issued to your employer by HM Revenue & Customs. The numbers and letter of the tax code provide information to your employer so they know how much tax to deduct from your income and the basis of operation.
The accuracy of your tax code is crucial to ensure you pay the right amount of tax, or you could end up paying too much or too little tax by the year end.
There are other types of tax code which may be issued to your employer but this would typically occur if you had two or more sources of income. You usually receive a tax code when you start your first job. As it is your first employment, you don’t have a form P45 to hand in to your new employer and instead complete a form P46. This form will require details which will enable your new employer to decide which tax code is appropriate to be operated against your income. The decision is based on information provided by HMRC. You will be asked to state whether your employment is your only employment or whether you have another job or a pension. If you are a student or a school leaver starting your first job, you should tick the appropriate box.
If you are a school leaver and this is your first employment, the tax code for that year will be operated against your income on a cumulative basis. For the tax year 2012-13 the tax code is 810L, which means you can earn £8105 during the year before paying tax. Whichever week you start employment, operating the tax code on a cumulative basis means that you will receive all tax free allowances due up to that week. Any tax previously paid may be paid back at this point through your wages.
If you have worked elsewhere during that tax year but don’t have a P45 to hand in to your employer, 810L will be operated but on a week one or month one basis. This is also called an emergency tax code. With this tax code, you will receive the correct amount of personal allowances for that week or month but you won’t receive a refund of tax if any is due to be repaid. HMRC will issue the correct tax code to be operated against your income in this case which will usually be operated on a cumulative basis.
A tax code is made up of basic personal allowances but can also include any expenses or allowances that you are entitled to. If you claim job expenses, subscriptions or an additional allowance it will be included in your tax code. However, if you make a claim for expenses, you can request the payable amount by payable order rather than being included in your tax code. Deductions like state pension or employer benefits are deducted from the amount of personal allowance so that your tax free amount of pay will be reduced.
You will receive a tax code every year if your tax code is anything other than the basic one. Your employer will also receive a copy so that they know which tax code to operate at the start of the tax year. It is important to check your tax code carefully, especially if you have any deductions like state pension or employer benefits. If there are any changes to these deductions throughout the year, or any other changes, you will receive a copy of the amended tax code.
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An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.