It is important as an employee to keep an eye on your tax code and contact HMRC if you think it is wrong.

There are many things which can affect your tax code such as:

·        You are both employed and self-employed.

·        You have more than one employment.

·        You and your spouse share tax via the marriage tax option.

·        You are claiming a pension.

·     You have worked consistent overtime which takes you over your current personal allowance threshold, or backpay can have the same affect.

·        You have a company car.

HMRC now receive ‘Real-time information’ via your submissions after each payroll. This means that each month they can update your employee file, issuing the appropriate tax codes, against any changes with the view to ensure you are paying the correct amount of tax each month.

A tax code is made up of numbers and letters. The number is how much tax-free income you get in that tax year for example, the most common tax code is 1257L, meaning that the employee can earn £12,570 tax free. This is often spread out over the year, so the employee will pay some tax each month based on a yearly figure, less £12,570 divided by 12 as calculated by HMRC. This is also why some people who work less towards the end of the tax year, are often entitled to refunds against the net pay for overpaying tax.

(Please note as an employer, if an employee is entitled to a tax refund this is to be paid by the employer as reflected on the payslip against their net pay and it will then be deducted from any PAYE or NI liability.)

The letters refer to your situation and how it affects your personal allowance for example ‘L’ means you’re entitled to the standard tax-free personal allowance, ‘M’ is Marriage Allowance meaning you have received a transfer of 10% of your partner’s personal allowance and ‘T’ means your tax code includes other calculations to work out your Personal Allowance.

If your tax code has a ‘W1’ or ‘M1’ or ‘X’ at the end, these are emergency tax codes and are often seen when you start a new job and HMRC want to ensure you are paying enough tax whilst they review your new monthly gross.

A tax code with a ‘K’ at the beginning means that you have income that is not being taxed another way and is worth more than your tax-free allowance such as paying tax owed from a previous year or receiving benefits that you need to pay tax on.

*Legally, a tax code cannot be changed without sight of the formal notice from HMRC. *

You can find more information on what your tax code means here.

You can check your tax code by logging into your personal tax account here. Within this portal you should be able to see all of your employments, the related tax codes and inform HMRC directly if any of the information looks incorrect. 

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