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What a tax code means

What a tax code means

21 March 2024

The letters in your tax code signify your entitlement (or not) to the annual tax free personal allowance. The tax codes are updated periodically and help employer’s work out how much tax to deduct from an employee’s pay packet.

Your tax code, a crucial financial indicator, shows whether you qualify for the annual tax-free personal allowance. Employers update these codes periodically to deduct the right amount from your pay.

The basic personal allowance for this and the next tax year stands at £12,570. If you qualify for the standard tax-free Personal Allowance, you’ll use the tax code 1257L. This code is common if you have one job and no untaxed income, unpaid tax, or taxable benefits like a company car.

Your tax code might contain other numbers and letters, each indicating different factors. For example, ‘M’ means you’re claiming the marriage allowance, while ‘S’ means you’re taxed using Scottish rates. If the numbers in your code change, it usually means your personal allowance has reduced.

If you’re a new employee without a P45, you’ll use emergency codes, denoted by W1 or M1. These codes base your tax calculations on your current pay periods.

If your code starts with ‘K’, it means your deductions exceed the personal allowance because of company benefits, state pension, or taxes owed from previous years. However, your deductions in each pay period can’t exceed half of your pre-tax pay or pension.

You should review your code regularly for accuracy. Don’t ignore any discrepancies or uncertainties. If you have questions or need clarification, ask your employer or HMRC directly. Understanding your tax ensures you’re paying the right amount of tax and helps you avoid potential financial complications. Remember, knowledge is power, especially when it comes to understanding your finances. Being proactive and informed about your tax code helps you avoid surprises at the end of the financial year and prepares you for the future.

Source: HM Revenue & Customs Tue, 19 Mar 2024 00:00:00 +0100

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