Even then, the majority of people wouldn’t know what the series of letters and numbers even stand for.
“Are you paying too much tax?” I would hazard a guess that 75% of the population wouldn’t be able to answer this question, either. And I bet there would be uproar if they were to discover that they are.
However, after HMRC admitted that over 3.5 million people overpaid taxes during the 2012-13 tax period, then maybe it isn’t a bad idea to learn about what your tax code signifies and how this can affect you.
A tax code provides you with details about how much of your money is going to HMRC; well, providing you know what the letters and numbers mean, of course.
Here is a quick cheat sheet that will help you break the codes:
BR: This indicates that you are paying the basic rate of tax – 20% of your overall income.
L944: Quite a generic tax code. ‘944’ signifies the amount of money that you are able to earn before paying any tax – in this case, £9440. ‘L’ represents the standard personal allowance for someone under the age of 65.
0T: This is quite a rare code, which is only used in extreme circumstances such as when your allowances have been exhausted or reduced to nil and your income is taxed at the relevant tax rates. This can also be used if you’ve recently started a new job and have not been given your P45 or you haven’t completed a P46 prior to your first payday.
D0: This code is used when all of your income is taxed at the higher rate of tax – now 40% (often used for a second job or pension).
D1: This code is used when all of your income is taxed at the additional rate of tax – now 45% (again, often used for a second job or pension).
K: When your total allowances are a smaller amount than your total deductions.
NT: When there is no tax to be taken from your income.
P: Used for the full age-related personal allowance for people born between 6 April 1938 and 5 April 1948.
Y: This is used for people born before 1938 and eligible for the full personal allowance.
Tax code mistakes can easily happen when people change jobs, because this can lead to incorrect data being sent on to new employers. HMRC are often responsible for this confusion, with millions of incorrect codes being issued. In addition to this, second jobs and tax on savings can also complicate tax codes, leading to people paying too little or too much tax.
Regrettably, most people don’t check their tax codes on a regular basis and trust HMRC’s judgement. By checking your tax code and filing all the necessary returns to HMRC you should at least be able eliminate the possibility of overpayment. But, you never know, if your tax code is wrong you may even net yourself a nice little tax rebate.
To discuss a tax avoidance enquiry with a tax investigations expert call 0800 471 4546, or alternatively you can submit your tax enquiry online.