This article will explain the different elements of the tax code affecting your tax-home pay.
1)What is a tax code?
A tax code is a combination of numbers and letters that determines how much income tax you need to pay to the Inland Revenue (HMRC).
2)How is a tax code used?
Your tax code is issued by HMRC and used by your employer or pension provider to calculate how much tax should be withheld from your salary and paid over to the Government.
3)How do you find your tax code?
Your tax code can be found on several different documents that you should have access to including:
- P45 (End of employment tax statement)
- P60 (End of tax year statement)
- P2 (coding notice)
- Pension advice slip
You can also contact HMRC online or via phone to ask them what your tax code is.
4) What do the numbers and letters mean?
The numbers in the tax code tell your employer how much tax-free pay you get. For example, in 2021/22 tax year, the Personal Allowance is £12,570. This means you can earn up to £12,570 before you pay any tax. The corresponding tax code if you are a basic rate taxpayer is 1257L. The number part of the code is the free pay amount with the final digit removed.
The letters help HMRC deal with more complicated circumstances such as having more than one income source, receiving Marriage Allowance or having income that has not been taxed in another way. If you have more than one job or you have a job and drawn a pension, each income source will have a different tax code.
Below are some examples of the common codes in use:
Codes ending in BR mean that your income is taxed at the basic rate (currently 20%) because your Personal Allowance has already been used up from another income stream. Similarly, D0 and D1 codes apply to those with second or subsequent jobs who pay higher rate (40%) and additional rate tax (45%).
If you receive Marriage Allowance which enables you to transfer 10% of your Personal Allowance to your spouse, then your code will end in M (If you receive part of the allowance) or N (if you give part of your allowance).
The code NT denotes that you are not paying any tax on this income.
Codes that begin with S are Scottish tax codes and those beginning with C are Welsh.
If your tax code starts with ‘K’ this means you have income that is not being taxed in another way. This could include company benefits or rental property income.
5) How do you check your tax code is correct?
If you only have one source of income and you receive your full Personal Allowance, then your code will be 1257L for 2021/22. However, if you have any other income sources, then those jobs may attract the BR, D0 or D1 codes if your Personal Allowance is fully used up with the first employment.
You can check your code using an online checker or you can call HMRC on 0300 200 3300 or +44 135 535 9022 if you are overseas.
Advice from Blacktower Financial Management
Ensuring that your tax code is correct is your responsibility, so make sure you read the PAYE coding notices when you receive them and act quickly if you think your code is wrong, especially if you think you have not paid enough tax. If you require assistance with tax and investment matters, our wealth management service provides a dedicated advisor to help you plan your financial strategy to achieve your present and future goals. We’ll work in partnership with you to identify the best mix of investments and we’ll regularly review your position to help you achieve maximum return on investment. Contact one of the representatives at our Algarve office today for your free no-obligation discussion.
Blacktower in Portugal
Blacktower’s offices in Portugal can help you manage your wealth to your best advantage. For more information contact your local office.
Manuela Robinson is the Associate Director of Blacktower on the Algarve, Portugal. We also have offices in Cascais and representation throughout Portugal.
Blacktower Financial Management has been providing expert, localised, wealth management advice in Portugal for the last 20 years. We can help with specialist, impartial advice on securing your financial future. Get in touch with us on (+351) 289 355 685 or email us at email@example.com.