De-coding tax codes

Accounting, National Insurance, Payroll, Personal Tax l

Tax-codesA tax code (also known as a PAYE code) appears on every payslip, but do you know what it means and how it is impacting on the net pay you are receiving?

Common tax codes include ‘BR’, ‘1100L’, ‘NT’, and ‘D0’, but what do these mean and what if they are wrong? HMRC expects everyone with a PAYE code to check it but do you and your employees (if you have them) realise this, and know where to start?

There are two general types of tax code

“Tax allowance”

These tax codes contain a figure and a letter. To determine the amount of tax free allowance you have been given, first remove the letter and add a zero to the end of the figure.

The most common tax code for 2016/17 is 1100L, which represents the recipient being given allowances of £11,000, the standard amount of personal allowance for the year.

If your tax code for 2016/17 is not 1100L, it means there are adjustments within your tax code. There are things that can both increase and decrease the amounts of allowances you get. If this applies, you should check that you are happy with each of the adjustments shown on your tax coding notice (these are issued by HMRC).

Some tax codes have the effect of reducing your allowances below £0, meaning that rather than deducting an allowance off your earnings and taxing the rest, an amount is added onto your earnings to give the amount you’re being taxed on. These tax codes always begin with a ‘K’. For example someone with a K250 code will be given no allowances, but effectively be paying tax on their earnings plus £2,500.

Flat-rate codes

These codes mean that all the income from this source will be taxed at the same rate. Usually these codes are the result of multiple sources of income, with the allowances being allocated by HMRC to other sources.

BR     – Basic Rate, all income to be taxed at 20%

D0     – Higher Rate, all income to be taxed at 40%

D1     – Additional Higher Rate, all income to be taxed at 45%

Some a BR code is issued even though they only have one source of income. This is usually due to the employer not having received a tax code from HMRC and in this instance it is correct for a BR code to be used. This is commonly referred to as the “emergency tax”.

In some instances a code NT is issued which stands for “No Tax”. This means the income source won’t be taxed at all. There are a number of reasons this might apply, and if you receive this code it is important to check it is correct as if wrong it could lead to a significant tax liability arising.

If you have any queries about your tax code, contact our payroll and tax experts at Morrell Middleton on 01904 691141.