As an employer who is running or considering running a payroll scheme, you will need to be familiar with tax codes. At Atkinson Accounts, we often recommend that directors of a company are put on the company’s payroll. In this case you are both an employer and employee and it is even more important that you understand your tax code.
When you take on a new employee you usually work out an employee’s tax code by using their p45. This code will usually be made up of several numbers and a letter e.g. 1185L.
The most common tax code is 1185L (2018/19). This is the code used for people with one job, no untaxed income, unpaid tax or taxable benefits (e.g. a company car).
The different components of a tax code have different meanings, and when collated they explain how much of a person’s income should be taxed.
What do the numbers mean?
The numbers in an employee’s tax code show how much tax-free income they will receive in that tax year. The first numbers in the tax code are usually multiplied by 10 to arrive at the total amount of income that an employee can earn before they are to pay tax. For example, if an employee has the tax code 1185L, this means they can earn £11,850 before being taxed. This amount is then deducted from their total income for the year, giving their taxable income. So, for an employee earning £21,000 on tax code 1185L they will have £9,150 of taxable income for the year (£21,000 – £11,850 = £9,150).
What do the letters mean?
The letters in an employee’s tax code relate to their individual situation and how this may affect their personal allowance.
|Code||How tax is deducted||When this code is usually used|
|0T||From all income – there is no Personal Allowance||When an employee hasn’t given you a P45 or enough details to work out their tax code, or when their Personal Allowance has been used up|
|BR||From all income at the basic rate||For a second job or pension|
|D0||From all income at the higher rate||For a second job or pension|
|D1||From all income at the additional rate||For a second job or pension|
|L||At basic, higher and additional rates depending on the amount of taxable income||For an employee entitled to the standard tax-free Personal Allowance|
|M||At basic, higher and additional rates depending on the amount of taxable income||For an employee whose spouse or civil partner has transferred some of their Personal Allowance|
|N||At basic, higher and additional rates depending on the amount of taxable income||For an employee who has transferred some of their Personal Allowance to their spouse or civil partner|
|NT||No tax is deducted||Very specific cases, for example musicians who are regarded as self-employed and not subject to PAYE|
|S||At the rates in Scotland||For an employee whose main home is in Scotland. It’s their responsibility to tell HM Revenue and Customs (HMRC) if they change address|
|S0T||From all income – there is no Personal Allowance||When an employee whose main home is in Scotland hasn’t given you a P45 or enough details to work out their tax code, or when their Personal Allowance has been used up|
|SBR||From all income – there is no Personal Allowance||For a second job or pension|
|SD0||From all income at the intermediate rate in Scotland||For a second job or pension|
|SD1||From all income at the higher rate in Scotland||For a second job or pension|
|SD2||From all income at the top rate in Scotland||For a second job or pension|
|T||At basic, higher and additional rates depending on the amount of taxable income||When HMRC needs to review some items with the employee|
How do I know if my tax code has changed?
If any changes are made to your tax code HMRC will inform both you and your employer in writing. No explanation behind the tax code will be provided to your employer. If you are still unsure of your tax code, or you believe you are on the wrong one, the HMRC helpline is 0300 200 3300.
Where can I find my tax code?
Your tax code can be found on your payslip or your P60/P45. If you have an online account with the revenue you will also be able to see this there. If you cannot find it in any of these places if you provide HMRC with your NI number and UTR they will be able to tell you.
What is an emergency tax code?
When leaving an employment your employer should give you a p45 showing how much you’ve earned and how much tax you have paid in the current tax year. It also gives you your tax code, your new employer will need this. If you don’t get a p45, your new employer will need to use an emergency tax code. Usually a tax code takes into account all the tax paid in the year to date, what amount of your salary falls in each tax bracket and any personal allowances due. If you are on an emergency tax code your employer does not have this information, and so you will pay tax on everything. Emergency tax codes can be up to 50% of your wage and are only supposed to be temporary. The following are examples of emergency tax codes:
My tax code is wrong, how do I correct this?
If you believe your tax code is wrong, you should contact HMRC who will issue your employer with a revised tax code as required. This can be done by calling 0300 200 3300.
I’ve corrected my tax code but have overpaid tax – how can I reclaim this?
There are two ways to claim back any tax overpaid through your tax code. Firstly, if the overpayment was made within the current year you will need to inform HMRC of this. You can do this online, using your personal tax account or by phone on 0300 200 3300. Once HMRC have processed your claim it might be necessary to issue you with a new tax code, resulting in any refund being added to your wages. This can result in a lower tax deduction or a tax refund through PAYE. Alternatively, if the overpayment was made within, or towards the end, of a tax year you will need to contact HMRC on 0300 200 3300. If you file a self-assessment form any overpaid tax can be reclaimed through this.
If you are a client of ours our qualified payroll department will ensure you and your employees are on the correct tax code. We will always inform you should any changes occur and rectify any errors with HMRC as required. For more information or for your free, no obligation consultation please contact our offices on 01244316449 or email us at email@example.com.