Have you checked your Tax Code on your payslip?
The Tax Code is a little piece of the payslip that is often overlooked, even though it is one of the most important pieces of the payslip to understand. There are some nuances that occur, as with most things in life, but hopefully the following will break down the myths for you.
Everyone within the UK is given a tax-free allowance by HMRC, the amount of earnings they can earn before income tax is due to be paid, in the Tax Year 2022/23 and 2023/24 the standard amount is ￡12,570.00 per year.
The tax code will most commonly be displayed at the top of your payslip and comprises of a series of letters and numbers. These letters and numbers can then be broken down into 4 separate sections, not all tax codes are the same length or have all 4 sections in use.
An example tax code with all 4 sections would be S1257LX
1) Country Marker – This is either “S” for Scotland (like the example above) or “C” for Wales, if neither of these appear as a prefix to the Tax code then it is a standard UK tax code. Scotland has different tax bands to England/Northern Ireland and Wales.
2) Earnings Allowance – The numbers displayed translate to the Earnings Allowance amount you have in relation to this employment, in the example above this is 1257, this means that you have an Earnings Allowance of ￡12,579.00. To calculate the earnings allowance, multiply the code number by 10 and then add 9 to the resulting value, HMRC do this to give the employee the advantage of rounding. A “K” code is an exception to this rule explained below.
3) Tax Letter – In the example above this is an L, all tax codes have a letter which indicates the calculation basis, if the letter is T, L, M or N then you have earnings which do not have to have tax paid on them. If the letter K is placed between the Country Marker and Earnings Allowance number, then you have additional earnings which need to be taxed in this employment so this value will be added to your earnings when calculating tax.
4) Calculation Basis – There are two ways to calculate tax; Cumulative or Week1/Month 1, in this example there is an X, some payslips may show this as W1, M1 or a *, these all mean that the tax is being calculated using only the earnings in the current pay period and does not factor in any previous earnings. If you do not have anything in this slot or the payslip is displaying “Cum” or Cumulative, then your tax code is calculated using all the earnings in this tax year. Most people will be subject to the cumulative calculation method for tax as it prevents under or overpayments of tax where earnings increase or decrease between pay periods.
The weird bits; as with all rules, there are some exceptions to the norm. The below codes are used to display how the tax will be calculated. These codes also deviate from the norm as no tax-free allowance is available before calculating any tax that is due. They are:
BR – All earnings taxed at 20% (19% in Scotland)
D0 – All earnings taxed at 40% (21% in Scotland)
D1 – All Earnings taxed at 45% (41% in Scotland)
D2 – All earnings taxed at 46% in Scotland only.
0T – No tax allowance but taxed at normal rates of income tax.