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4 Common Payroll Questions: Tax Codes

Tax Dates

Author: Kay Augustus, Head of Payroll

Your tax code looks like a random bunch of numbers and letters but there’s a lot more to it than that. Your tax code identifies where your tax goes and how much tax an employer can directly deduct from your earnings before you receive any money. Here are 4 common tax code questions we hear a lot in payroll.

1. What does my tax code mean?

In 2021 the current tax code is 1257L. If you live in Wales the tax code will be ‘C1257L’ (the C being Cymru), and in Scotland it’s S1257L (I’m sure you can see why). The 1257 of the tax code represents the amount of tax free pay you will receive within the financial year. Adding an extra zero to the 1257 gives us 12570, telling us that you can earn £12,570 tax free within that year.

2. How is my tax calculated?

Tax works cumulatively so the tax code is split across 12 months and this is the amount you can have tax free per month. For example, £12,570 ÷ 12 = £1,047.50 tax free per month, so if you earn £1,500 per month, you will pay tax on £452.50 (1500 minus 1047.50 = 452.50).

If you don’t use all your tax-free pay within the month, the remaining tax-free amount is carried forward into the next pay period. For example, if you are paid £1,000 per month, the remaining £47.50 is carried forward. Unless you are on a Week1/Month 1 basis and this will take only that period’s tax into consideration and won’t work on a cumulative basis. Previous earnings and tax paid in the current tax year is ignored for the purpose of the calculation. You may find that your tax code isn’t 1257, it could be higher, or lower based on your circumstances.

3. What is a ‘marriage allowance’?

Married couples can benefit from HMRC’s shared tax service. If you or your partner don’t earn enough to use all of your tax-free pay then you can share your tax code with your husband or wife.  Marriage allowance lets you transfer up to £1,260 of your personal allowance over to your husband, wife or civil partner. This can save £252 in one tax year.

If you benefit from the marriage allowance your tax code will have a ‘M’ at the end of it, and if you have transferred the allowance to a partner then your code will show as a ‘N’ at the end. If you are just finding out about this now, you can back date your tax code to 5 April 2017 and reclaim anything owing to you by contacting HMRC. 

4. How does my employer know how much tax to deduct?

There are a few ways an employer can receive a tax code. If the employee is new, they may present their employer with a P45, the employee may complete a starter checklist, or HMRC will inform the new employer of the tax code after the first payroll submission by issuing a notice of coding (P6 or P9).

If you believe yourself to be on an incorrect tax code your employer can’t change it. You should call HMRC’s employee helpline or login to your personal tax account. Other tax codes include:

  • 0T – where an individual is given no personal allowance. This can sometimes be used if an employee fails to give their new employer a P45 or complete a starter checklist. It can also be used when the personal allowance is used by a previous income, or when processing a payment after leaving.
  • BR – all tax is to be deducted at Basic Rate (currently 20%). This is normally used when personal tax is used up. This could be due to a second job or pension.
  • D0 & D1 – There is no personal allowance, and all tax is to be deducted at the higher rate. D0 is 40% and D1 is 45%. This can be because the individual has more than one income.
  • NT – This means No Tax (or Nil Tax). The code should only be used when HMRC advises the employer.

Let’s Talk

For help with your payroll, simply contact our team at LHP Payroll who can talk you through all of the available options and benefits at your convenience. Let’s Talk.

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