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A tax code, which is made up of numbers and a letter, will be used by HMRC and your employer to ensure you pay the correct amount of tax. An incorrect code will mean that you pay either too much or not enough on your income.

Types of tax codeTime For Tax
The most commonly used tax code is made up of numbers followed by a letter. Adding a zero onto the end of the numbers will tell you how much you can earn during a year before having to pay tax. The letter will be added to the end of the numbers and each letter will provide specified information to an employer or pension provider.

The most typical letter is ‘L’, and this is used to denote anyone who is entitled to the basic Personal Allowance and was born after 5th April 1948. For the 2013-14 tax year, the code would be 944L and informs an employer that you can receive £9,440 without paying tax during that financial year. If your employer doesn’t have knowledge of your previous employment or circumstances, they will operate an emergency code to deduct the correct amount of tax on a weekly or monthly basis. This is also the basic code.

Age allowances
Anyone born between 6th April 1938 and 5th April 1944 will be entitled to age allowances and this is denoted by numbers indicating tax free amount and a letter ‘P’. Age allowances are reduced if your income exceeds a specified limit each year. For every £2 which is over the threshold, £1 is deducted from your personal allowance.

For people born prior to 6th April 1938, the personal allowances are increased. The same rules apply regarding the amount of income you receive and the personal allowance will be reduced to reflect the amount which is above the threshold.

Other tax codes
The letter ‘T’ is used when you may need changes making to your tax code, perhaps if your income exceeds £100,000 or if there are deductions included.

Code BR is used to indicate that all that income should be taxed at the basic rate, without any personal allowances being given. It may be that all of your personal allowances have been allocated to another source of income.

Tax codes are complex and it is crucial that the correct one is applied to your income. Seek professional advice if you are unsure.

 

 

About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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