As 2023 begins, many people will be already looking to cut down on spending habits after an expensive Christmas and New Year.
Some people will already be awaiting their first payment of the new year, as their wage slips begin to filter in. However, according to the Money Saving Expert team, thousands of people are paying too much tax on their wages.
Martin Lewis posted a guide on Twitter alongside this message: "MY 8 ENERGY NEED-TO-KNOWS: Prices will rise 20% for almost everyone in April, but some are being hit by big unexpected rises NOW.
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"Plus updates on check your DD, cost of living payments, LPG/heating oil, park homes, N Ireland, Eco 7 and more FULL INFO:"
In this link, people are urged to check if they are owed thousands of pounds in tax, due to an error in the code. Your tax code is the short number - such as 1257L - that tells your employer how much tax to take from you.
Millions are wrong each year, and the rules say it's your responsibility to check it's correct (not your employer's or HM Revenue & Customs').
Thankfully, the Money Saving Expert team have released a full guide to tax codes, and how to check if yours is correct. Read on below to find out more.
What is a tax code?
A tax code is simply a series of numbers and letters, for example 1257L, S1257L, C1257L, BR, and K497.
If you're a full or part-time employee, or receive a private pension, these hieroglyphics are used by your employer(s) or pension providers to calculate the amount of tax that should be deducted from your wages or pension before it's paid into your bank account.
This is known as the pay-as-you-earn (PAYE) system, though not everyone is taxed in this way. You won't have a tax code if you're fully self-employed, unemployed or you only receive the state pension.
You can check for your tax code in the following ways:
- On your payslip - Ask your employer if you can't locate your latest one.
PAYE coding notice (or P2) - Sent around January to March, before the start of the tax year. It explains how your code was generated.
P45 - The form your employer gives you when you stop working for it – and the one you give to your new employer when you change jobs.
P60 - An annual summary of your salary and the tax that's been deducted. Your employer is required to give you this at the end of each tax year.
Pension advice slip - If you're receiving a private pension, the easiest place to find your code will be on any pension advice slip or on your P60 sent once a year.
HM Revenue and Customs website - You can check your tax code with HMRC online.
What does my tax code mean?
Your tax code will usually be made up of letters and numbers. The letters and numbers indicate different things, with the numbers showing the amount of money you can earn tax-free - also known as a personal allowance.
You need to add a zero to get the real number, so 1257 means you can earn £12,570 a year tax-free – that's the amount you can earn in a year before your employer needs to deduct tax. The size of this allowance depends on your income and whether there are any deductions or additions.
Deductions include benefits at work like a company car, discounted rent or medical insurance. Additions are things like working-from-home tax relief.
Above this allowance, you pay tax on income, though the amount you pay depends on your total earnings.
The letters relate to personal circumstances and how it alters your personal allowance. In Scotland, we have an S at the start of our tax codes, but the rest of the letters will come at the end of the code.
What the letters in a tax code means
- L - You're entitled to a tax-free personal allowance. For those earning under £100,000 with no taxable perks (such as a company car) this should be £12,570 for 2022/23.
- S0T - You're not entitled to any tax-free personal allowance and all income is taxed in line with income tax bands. It's often a code you're put on when your employer doesn't have enough information about your previous employment, or you earn more than £125,140.
- SBR - You're not entitled to any tax-free personal allowance on income from this job or pension and pay 20 per cent basic-rate tax on the whole amount. This is often used for a second job or pension, as it assumes your personal allowance is used on your main income. It's important to ensure HM Revenue & Customs (HMRC) knows which is your main job (generally the one that pays you most) as if it's the wrong way round, it can cause problems.
- SD0 - You're not entitled to any tax-free personal allowance and all income is taxed at the 21 per intermediate rate in Scotland. This is often used for a second job or pension.
- SD1 - You're not entitled to any tax-free personal allowance and all income is taxed at the 41 per cent higher rate in Scotland. This is often used for a second job or pension.
- SD2 - This is only used in Scotland and shows you're not entitled to any tax-free personal allowance and all income is taxed at the 46 per cent Scottish top rate. Again, it's often used for a second job or pension.
- K - Your personal allowance has been eroded down to LESS than nothing, meaning the number after the K is actually a negative personal allowance. This can happen if you have income that isn't being taxed another way and is worth more than your personal allowance, such as paying back tax from a previous year, or getting work benefits that you have to pay tax on (and they're worth more than, or you're not entitled to, your personal allowance).
- M or N - You'll have this at the end of your tax code if you or your spouse/civil partner have received (M) or given (N) the marriage tax allowance. This allows non-taxpayers to transfer £1,260 of their personal allowance to their basic-rate tax-paying spouse or civil partner.
- NT - No tax is paid on this employment or pension income.
- T - If a T follows a number that isn't zero, it means you do get a personal allowance, which is dictated by that number. However, it also means your tax affairs need to be reviewed by HMRC, which typically happens if they're complex.
- W1, M1 or X (emergency codes) - These may come after a normal looking tax code, for example 1257L W1. Typically this happens if there's a delay in HMRC receiving details about a change in your circumstances, for example if you've just started a new job.
How to check if my tax code is correct?
There are millions of errors, so never assume your code is correct. Anyone can be affected, but you should take action quickly.
The amount of tax you pay is based on your total income for the tax year – whether this is from one, two or more jobs, interest on savings, or rental income from a second property that you own. But you will still only have one personal allowance (the amount you can earn before tax) for all of them.
Use the Money Saving Expert's Tax Code Calculator to find out if you are paying the right amount of tax. If not, you will need to contact HMRC immediately.
The MSE team also notes this about the calculator: "This is just an estimate. It compares your current tax code against the most common one for your salary.
"If it doesn't match, it could suggest you're on the wrong code - though you'll need to contact the tax office to be sure."
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