The 5th April marks the end of one tax year and the 6th April marks the beginning of the next. This means that new tax codes will be issued soon. HMRC start posting them in January, but not everyone will get one in the post; you may have agreed to use your Personal Tax Account so you might just get a message to log into your account to view them. Tax codes are the mechanism HMRC use to collect tax so it’s very important that you understand what your tax codes mean to you - will they collect the right amount of tax? Checking them is vital.
Check your allowances for 2018/19
- most people have a tax free allowance of £11,850
- one of you born before 6th April 1935? You may be entitled to the Married Couples Allowance
- born after? If one of you has spare tax free allowance they can share £1,185 of it with their spouse. This is the Marriage Allowance
- registered blind? You can claim the Blind Person’s Allowance of £2,390
- do you have job expenses or subscriptions?
Check your deductions, these are usually taxable incomes that cannot be taxed at source
- State Pension – is not taxed at source so must be included in your code
- other taxable benefits like the Employment & Support Allowance, Carers Allowance or Job Seekers Allowance
- any allowances transferred to your spouse
- any underpayments for previous years (do you agree with them?)
- any untaxed interest or dividends over their respective allowances
- an in-year underpayment. Where HMRC believe you will underpay this year they will make an adjustment to your code so it balances by the end of the year. This is complicated, and we recommend that you check it works.
The code is then calculated by taking your deductions away from your allowances leaving you with the most important bit, your actual ‘tax free allowance’. The system removes the last digit, replaces it with a letter and sends it to your employer or pension provider to use. If your deductions are larger than your allowances it means you have used up your tax free allowances and need to pay tax on the negative figure it creates. HMRC put a K at the start of the code so that the provider is aware. The tax is collected by adding this amount to your income source before taxing it.
Finally – Check that the pension providers and employments listed are correct.
The letters that follow are just instructions to the employer/pension provider:
- L standard tax-free personal allowance
- T your code will not change until it has been reviewed by HMRC
- M you have received 10% of your spouse’s personal allowance
- N you have donated 10% of your personal allowance to your spouse
- BR no surplus allowance and income will be taxed at the basic 20% rate
- X HMRC will review the tax paid at the end of the tax year
- K a negative amount of tax free allowance, tax has to be paid on this amount
- NT you will not pay tax on this income
- DO tax will be deducted at 40%
- S you are resident in Scotland
Posted in: Tax Tips