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Tax codes: What are they? (Part 1)

Tax Codes
1. Tax codes: What are they? (Part 1)
2. Tax codes: What are they? (Part 2)

Common questions permanent employees ask about tax codes

Why is my tax code different to my friends and does it make a difference to the amount of tax I pay?

In this series of articles, we will answer this question.

What is a tax code and why is my tax code important?

The HMRC (Her Majesty Revenue and Customs) makes use of a tax code to tell your employer how much tax they need to deduct from your Gross pay. There are many reasons why the HMRC would adjust your tax code:

* You might have paid too much or too little tax in the previous tax year;

* You have two jobs;

* You receive taxable benefits from your employer, or

* The HMRC knows that you have other income on which additional tax is payable.

Since your employer won’t be aware of all your circumstances, they rely on the tax code to work out how much tax they need to deduct from your Gross pay. It is therefore very important that when you start working for a new employer, you always give them a copy of your P45 (P45 is issued by an employer when you leave a company).

If you think that your tax code is wrong, then you need to contact the HMRC and explain to them why you think they have issued the wrong tax code for you. If your tax code is wrong, then the HMRC will send out a letter to your employer within a couple of working days to inform them what your new tax code is.

What to do if your tax code is wrong

Your tax code only affects the amount of PAYE (Pay As You Earn tax) you need to pay, it does not affect the amount of National Insurance payable.

Where can I find out what my tax code is?

You’ll find your tax code on your P60 or P45 (given to you by your employer when you stop working for them).

You’ll also find your tax code on your ‘PAYE Coding Notice’ sent to you by your Tax Office, usually before the start of each tax year. (It may also be sent to you at other times if something has changed, for example if you’ve started receiving a new source of income or a new company benefit or your entitlement to age-related or other allowances has changed.)

Please read part 2 for more information about how tax codes work.

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