For individuals, your tax code is issued by HM Revenue and Customs (HMRC) and is based on various factors, such as personal allowance, taxable benefits, and additional income sources.
Here are some of the key points we think are important about UK tax codes.
Structure of Tax Codes
A UK tax code is typically composed of one or two letters followed by a series of numbers. The most common tax code for individuals in the 2023/2024 tax year is 1257L, which indicates the standard tax-free personal allowance.
Personal Allowance
The tax code represents the amount of income an individual can earn before they start paying income tax. The standard tax-free personal allowance for the tax year 2023/2024 is £12,570. For example, if someone has a tax code of 1257L, it means they can earn £12,570 in a tax year before income tax is deducted.
Tax Code Letters
The letters used in a tax code reflect various factors that affect an individual’s tax calculation. Here are some common tax code letters and their meanings:
L: Represents the standard tax code for individuals eligible for the basic personal allowance.
M: Indicates that the individual has received a transfer of 10% of their spouse’s or civil partner’s personal allowance.
N: Signifies that the individual has transferred 10% of their own personal allowance to their spouse or civil partner.
T: Indicates that there are other calculations being applied to the tax code, such as a reduction due to certain circumstances.
K: This is used when the total taxable benefits or expenses are higher than the individual’s personal allowance, resulting in additional tax being deducted.
Emergency Tax Codes
If HMRC does not have enough information to assign the correct tax code, an individual may be placed on an emergency tax code. Emergency tax codes often start with the letter “X” and result in a higher amount of tax being deducted until the correct information is provided.
Multiple Jobs or Pensions
Individuals with more than one job or pension may receive multiple tax codes. HMRC aims to allocate the personal allowance fairly across the different income sources, but errors can occur. It’s important to review tax codes and notify HMRC if there are discrepancies.
Annual Tax Coding Process
HMRC conducts an annual review and issues new tax codes before the start of each tax year. These codes are sent to employers and pension providers to ensure the correct tax is deducted throughout the year.
It is essential for individuals to check their tax codes regularly to ensure it is accurate and reflects their current circumstances.
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Alistair Allcock
Alistair AllcockAli has a wide range of experience within the accounts and audit areas, drawing on his experiences from working for both large and mid-tiered practices. Find out more about Ali here.