Posted: 28. June 2019 by: Rupert Tennant

Explanation of Tax Code

Tax code is the code made by HMRC to sort and explain the tax obligations of the individual payers. These are numbers and letters you’ll see on every statement that will be sent to you by HMRC, and it’s the number you need to pay attention to.

There are often mistakes in regards to this number since that’s the case with any large and complicated administration.  It’s therefore important to know what these numbers mean and to make sure that it’s not changed without reason.

The numbers on it

The code consists of two parts. There are numbers and letters. You should start reading and explaining the code with these numbers since they have there to figure out how much you need to pay and what your tax breaks and tax allowances are.  They state what your personal allowance is.

It also states what your income is and therefore what’s the income on which you need to pay your taxes. If there’s also some tax-free income that you’ve earned it too is stated in the tax code, and that’s what the number is there to indicate.

The letters

The letters on the tax code are there to explain your allowances and other special considerations regarding your tax obligations.

L- means that you have the right to some tax allowance and the numbers indicate how much
M- states that there’s a marriage allowance and that means that you’ve transferred your part of the allowance to your spouse
N- this is also an indicator of marriage allowance, and it states that the allowance is transferred to you
T- means that there has been a reduction in your allowance, which is the case for those earning above £100.000 a year
0T- means that you have no more allowance
BR –stands for basic tax rate
D0- stands for a higher rate
D1- stands for an additional rate
NT – means that you pay no taxes
S- stands for Scotland which has additional rules of its own

The same goes for marks such as S0T, SBR, and SD1. They indicate the rates but as they are in Scotland.

C-stands for Wales with its own tax rates and tax rules when it comes to allowances

Additional markings are the same as they are for UK and Scotland but with the prefix of a letter C marking Wales.

 The letter K

Suppose your tax code has a letter K at the beginning that means that the income isn’t being taxed. That can be the case for a variety of reasons. It might be deducted in some other way. In some cases, that’s because your whole taxable income isn’t over the threshold for it to be taxed.

There’s a difference between being taxed at zero rates and not being taxed at all. When you’re taxed at zero rates, you won’t pay any taxes, but you need to send tax return as any other business. That’s where you’ll see K at the beginning.

Emergency tax code

There are a few reasons you might have these emergency codes. They are there when you need to be taxed all of a sudden, and you’re not prepared for it as you otherwise would. This could be because you have a new job, you’ve just started being self-employed, and you start getting company benefits or a State pension.

The tax is still paid on the income beyond personal allowance, which is now set at £12.500 a year. The following tax year will be taxed with ordinary codes.

Updating and checking the code

There may be a mistake with the code since that simply happens sometimes due to the complexity and the scale of the work done by HMRC. You’ll need to check your code every time so that you’re sure you’re taxed as you should have been. When you notice a mistake, you should contact HMRC and ask for it to be changed.

When something changes in your circumstances and you need to get a different code, you should notify HMRC about that fact. This can be done via the site or on the phone; HMRC has a variety of channels through which it can be contacted.

 Conclusion

A tax code is a way for HMRC to figure out how you need to be taxed and to keep track of what your rates and allowances are. This is one with a series of numbers and letters that you should keep track of and understand their meaning.

When you need to change this code or when you notice that it’s not the right code for your business, you should notify HMRC right away since that’s your obligation and the only way to make sure you’re taxed correctly. This could be done both offline and online.

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