Many employees have a common question soon after their first or second salary payment: whether their pay is accurate. In reality, many have been given the wrong tax code. Once the wrong tax code is issued, the employee is forced to contact HMRC via phone (0300 200 3300) or online. But as an employer, there are things that you can do to ensure you, your business, and your employees are all given the correct tax code.
Read on for explanations of a Tax Code, why it may change, how to minimise miscalculations in payment, and more.
Table of Contents
What Is A Tax Code?
A tax code is effectively a reference number, made up of letters and numbers, and is assigned by the HMRC to calculate the due income tax of an employee, employer or pension provider. Tax codes are displayed on payslips, and they can be referenced manually to find out whether it’s right for you.
If a person’s tax code is wrong, this means a person may end up paying more or less income tax than they’d otherwise need to.
What Tax Codes Can A Person Be Assigned?
The following are the formats in which tax codes often come:
- 1257 – This is the standard tax code most people are assigned, applying to people who have one job and no untaxed income, unpaid tax or tax benefits.
- BR – This code means “basic rate”. It’s applied to those with a second job, who are on their pension, whether it’s a state pension or a private pension.
- 1257L W1/M1 – This is called an emergency tax code. An emergency tax code is levied in response to a new employee starting a job whilst the HMRC is unsure of what their tax code should be. W1 is assigned for weekly pay, and M1 for monthly. The “1” stands for how many months or weeks until it’s changed to the right tax code. HMRC uses emergency tax codes to avoid or minimise tax losses. When you get the correct tax code on your updated account, you will be notified of the under or overpayment for HMRC.
- 1257 X – This is a code used by HMRC when they do not have enough information, including pay frequency (weekly or monthly) to determine the tax code.
- 0T– OT is a tax code that denotes that no tax-free allowance is available, often used for those with several jobs/pensions where the personal allowance is used elsewhere.
- Kxxx – The code indicates deductions for company benefits, unpaid tax etc exceeding the personal allowance.
- NT – No tax is deducted, used typically for low earners.
Self-employed, sole traders, partnerships, limited companies and those who receive investment revenues and dividends are meant to calculate their due taxes to be paid to HMRC, via self-assessment tax returns, due the 31st January following the end of the tax year that the income was received.
How To Check Your Tax Code?
In this section, we’ll break down the different ways in which people, regardless of their position within an organisation, can check their tax code.
- Personal Tax Account – Anyone from sole traders to partnerships, to limited company directors can check their tax code in their tax account on the HMRC Online website. All tax information is stored here, including tax codes.
- Payslip – The PAYE system automatically makes tax payments on a person’s behalf, usually an employee. Your tax code will appear on your payslip as a result.
- Business Tax Account – A limited company director will have a business tax account. The company itself doesn’t have a tax code, but they do have access to information relevant to the company’s tax affairs.
What Is An Employer’s Role In Tax Codes?
A tax code is used to calculate how much income you earn, how much income tax is owed, tax relief on expenses, and any other benefits via an employer or pension provider. When a tax code is incorrect, it could result in underpaid or overpaid tax, entitling a person to a tax refund.
Again, an employer cannot change an employee’s tax code. The following are the best practices to follow:
- Promptly Update Payroll Records – When you receive a p6 Coding Notice, or another type of notification via HMRC regarding a tax code change within your organisation. Update the payroll software or records immediately after.
- Take Account of your Employees – Ensure you have up-to-date and correct information about your employees, and ensure they are aware that a change in circumstance may prompt a change in tax code.
- Direct Employees to HMRC – If you suspect an employee may have a tax code change, let them know. After all, some employees may not understand the system and may believe that they’ve been underpaid.
What Prompts A Change In Tax Code?
Typically, the following are the most likely culprits of an unexpected change in the current tax code:
- Job Change – Starting a new job, moving to a different position or even simply changing hours can prompt HMRC to change your tax code.
- Income Fluctuation – Significant changes in an employee’s income can be a promotion, pay raise or bonus, confusing the HMRC system.
- Taxable State Benefits – Company cars, private healthcare, or other perks that are taxable may cause tax codes to shift.
- Marriage Allowance/Civil Partnership – If an employee gets married or enters a civil partnership, their tax-free allowance may be affected.
- State Pension or additional income – Receipt of a state pension or second job can impact tax codes.
How To Change Your Tax Code?
Contacting HMRC is one of two ways to change your tax code. That being said, many tax codes are automatically changed unless HMRC is missing information they need to tax properly. It’s usually either a week or a month.
If no changes have been made after this, then whoever is affected must contact HMRC themselves. The overpaid tax is then returned in a tax return, or if it’s a low amount of tax, deducted from future tax payments.
The HMRC website enables you to change your tax code online. To do so, you should have a personal tax account at www.gov.uk/personal-tax-account. You can also contact HMRC via phone (0300 200 3300).
If you have an accountant or tax advisor, you should already have the information needed to change your tax code with HMRC on your behalf, but first, you must visit and ‘authorise an agent to handle your tax affairs’ on HMRC’s website. Ensure that your accountant has all your accurate tax details to make the necessary changes to your tax code. Aside from an official aid, you can also have a friend or family member register to manage your tax online.
Why Is Income Tax Collected?
Income tax is a source of funding for public services throughout the UK, such as healthcare, education, defence, and infrastructure – things the average person organically uses and benefits from. Income tax is an essential service, for wider society.
The amount of income tax paid increases with salary increase. Let’s say you earn between £12,751 and £50,270 per year, then you pay 20% as income tax. Those who earn between £50,271 and £150,000, will have 40% deducted from their income as a tax. When annual earnings become £150,000, the rate of income tax increases to 45% annually. Therefore, the income tax in the UK follows a progressive tax system. As an aside, those who may want to pay tax can do so via the income tax online service.
Who Pays Income Tax?
If a person’s annual income is over £12,570 for the tax year of 2023/2024, then you’re entitled to pay tax via a tax code. If you are not currently, technically, that is an offence. It’s best to change your tax code online immediately. Anything below this figure, however, means a person is not required to pay tax. You can also check your tax code for a previous tax year by accessing your personal tax account online.
If you doubt that you are put on emergency tax by mistake, or that there are errors in calculating your income tax, make sure that you contact HMRC promptly to resolve any issues and ensure you are paying the right tax amount.
Summary
In the end, an employer or pension provider has very few requirements when a tax code is incorrect, as the responsibility is placed on the shoulders of the person who has the incorrect tax code. It’s important to know of this situation, however, as many may think that their employer has underpaid them. In modern business, it’s best to look out for your employees by informing them when you become aware of a change in tax code.
This article has outlined for you the steps you can follow to change your tax code, as well as the responsibilities each party has.
It is important to check your code regularly to ensure that it is accurate and up-to-date. If the incorrect code has been used, HMRC will issue a notification of underpayment or overpayment and will adjust your code accordingly.
