Ever wonder why you receive your paycheck at the end of the month with deductions. Let’s introduce to you the tax code system which is the culprit behind this.
Whenever you receive your payslip, you can see the code written on it next to your National Insurance number. This code is the secret behind your tax payment. It determines your PAYE tax amount that you pay every time you get your pay check.
If you somehow get it wrong, it is possible that you pay extra money to HMRC. So, you have to make sure that you are on a right tax code to avoid paying extra tax money.
In below paragraphs we will explain how this works. We will see the meaning of the tax code. Also, what can you do if you have come across a wrong tax code.
What do you mean by tax code?
This is the designed system that keeps watch on your tax payments and cut your tax money from your earnings directly. It actually calculates the amount of tax from your pension or pay.
Your employer with the help of this code will know how much money they have to deduct from your pay.
Every person who is employed in a company or any work place is assigned a tax code by the central tax body HMRC. The code contains both the numbers and the letters.
How to work out your tax code
The numbers in your tax code will figure out your yearly tax-free income. It is based on your tax-free personal allowance. Tax-free personal allowance is your income without tax and other benefits from your company which include cars, loans and living.
The Personal Allowance for 2020/21 is £12,500. So, the number you are looking for this period is 1250. Many employees will be looking at this number because the personal allowance is unchanged for 2019/20.
What does the letters in your code represent?
The letters in your tax allowance represent the different situations and events in your life that affect your personal allowance.
- Letter L represent the normal tax-free Personal Allowance
- Letter M and N is for Marriage Allowance; 10% of the income from partner is transferred to the spouse.
- Letter S represent the taxed pension or income using Scottish rates.
What if you have the wrong tax code?
If you get a wrong tax code, you should do one simple thing. Contact HMRC. Basically, you have to make sure that your code is right. But don’t worry. If you pay more money than you suppose to, then HMRC will tell you about it by post.
Will you receive your money back?
Your money will be adjusted with right tax code. It means that next time you will pay tax with the right code you have to pay less tax and you will receive more pay.
What if you overpaid in previous year?
If you found out that you overpaid last year to the HMRC then HMRC will send you the amount check.
In another likely situation, if you pay less to the tax body then you have to pay. In this case, you will get either an emergency tax code or you will receive a tax bill.
Why tax codes change?
Do you know why your tax code change? Or why it gets updated sometimes when you make changes in your job or switch your job? These codes actually get an adjustment every year. This is due to the changes in the National Budget.
What if you change your job?
But sometimes you will observe code change when you make changes to your job. If you are working at some place and your circumstances get change, your code may get altered.
if you are doing double jobs you will get two codes. Your other salary will get taxed through different code.
Example of code change
John paid extra money to the HMRC in 2019. Now he realized and want his money back. HMRC will give John his money back but John will receive a new tax code.
Later John also start receiving benefits from the state, his code will be updated.
In 2020, John has a change of mind and he decides to do some extra work and his income is outside of PAYE scheme, HMRC will update his code. He also finds the one person he wants to spend the rest of his life; the marriage will update his code.