Updated: Aug 2, 2018
What do you do when your payslip arrives? If you just scan down at the net pay figure at the bottom, you certainly aren’t alone - that’s the amount that will be popping up in your bank account after all. Plenty of people don’t even bother to look at their payslip at all, sticking it in a drawer for another time. But this is a mistake. It’s really important that you pay close attention to your payslip in order to ensure you are being paid the right amount.
And the key is that little jumble of numbers and letters - your tax code.
What is your tax code?
All employees will have a tax code on their payslips. This is given to you by the taxman, HM Revenue & Customs (HMRC), and outlines how much tax you should be paying.
There will be a number and a letter. The number points towards what your personal allowance is. This is how much you can earn before having to pay any income tax.
There will also be a letter there, which will refer to your personal situation and how that may affect your personal allowance.
The most common tax code
At the moment, for the 2018/19 tax year, the most common tax code will be 1185L.
That’s because the basic personal allowance is £11,850 - most of us will be able to earn that much over the tax year, free of paying any tax. And last year for 2017/18, when the personal allowance was £11,500, the most common code was 1150L.
L is the letter most of us have on your payslips. According to HMRC, this essentially means that you are entitled to the basic personal allowance and your income tax will be deducted at the basic, higher or additional rates, depending on exactly how much you earn.
But while this is the most common tax code, there are LOADS of different other codes in use.
A couple of years ago, the Government introduced a tax break for married couples or those in civil partnerships. It essentially allows one partner to transfer some of their personal allowance to the other partner and can save you more than £200 a year.
Check out how the marriage allowance works and how to go about claiming it here. https://www.gov.uk/apply-marriage-allowance
Claiming it will change your tax code too. If you are the person receiving some of your partner’s personal allowance, your letter will instead by M. But if you are the partner transferring some of your allowance, your tax code letter will be N.
If you have more than one job, it’s important that you check the tax codes from your different employers too and see what they add up to.
There are three different codes used to cover additional jobs (or pensions).
BR means that all of your income from this job will be taxed at the basic rate, currently 20%.
D0 means that all of the income will be taxed at the higher rate currently at 40% and
D1 means it will be taxed at the additional rate of income tax, currently 45%.
The danger here is that if you see a D, when it's not your second job, you could well be losing more than £2,000 a year from your salary to tax that you don't need to. If nothing else, it's worth checking your payslip for that now.
Emergency tax codes
You may be put on an emergency tax code if you’ve just started a new job or if you’ve taken a job as an employee after being self-employed or you’re receiving company benefits or state pension. These are only temporary codes: 1185 W1 for weekly paid, 1185 M1 for monthly paid or 1185 X.
In each case they mean that you will pay income tax on all income above the basic personal allowance.
What about a K code?
A K tax code is a little different, and not just because the letter appears at the start of the code rather than the end. Tax codes with ‘K’ at the beginning mean you have income that isn’t being taxed another way and it’s worth more than your tax-free allowance.
For most people, this happens when you’re: - paying tax you owe from a previous year through your wages or pension - getting benefits you need to pay tax on - these can be state benefits or company benefits
While other tax codes will outline what income you can enjoy tax free, a K code shows the additional taxable amount that is added to your income. So for example, if you receive some form of additional income from your employer on top of your main salary - for example a company car - that needs to be taken into account, and will be deducted from your personal allowance. If those deductions are worth more than your personal allowance, then you'll be given a K code.
Live in Scotland? You get a different tax code. An S will appear on your payslip to show you are being taxed at the rates used in Scotland. This happens when your main residence is north of the border. See the full list here: https://www.gov.uk/tax-codes
There are a few other tax codes in use that are worth noting.
If your payslip has the code 0T this means that there is no personal allowance at all; in other words, you will be taxed on all of your income. HMRC explains this may be used when an employee hasn’t provided a P45 or given enough details to work out their tax code, or if their personal allowance has already been used up.
If NT is on your slip, it means there will be no tax deducted. This is only used in very specific cases, such as for musicians who are regarded as self-employed or people who have no tax liability in the UK and so are not subject to PAYE.
Finally, there’s T, temporary, which denotes that your income will be taxed at usual rates, but that HMRC needs to review certain items with you and will award a new tax code each year.
I’ve paid too much tax; can I get it back?
If the taxman has overtaxed you, you should be able to get it back.
With so many tax codes in use, it’s perhaps not surprising that mistakes are made. If you think you’ve been on the wrong tax code and have paid too much, then you need to contact HMRC. You can do so over the phone on 0300 200 3300 or on its website. If you are successful, remember that the taxman will tell you by letter - those emails that pop up in your inbox claiming to be from HMRC and promising a tax refund should go straight to the scam folder.
If the money you are owed is from the current tax year, then your tax code will be amended and the money will be refunded through your monthly paypacket.
If it’s from a previous tax year, then you’ll be sent a refund by cheque in the post. You may be paid a small rate of interest on top too. You can claim back up to four years of overpaid tax. So if you reckon you were too generous to the taxman in the 2014/15 tax year, then you need to make a claim before the tax year ends.
It goes both ways though; it may be that the mistake has been in your favour, and you’ve underpaid tax. Don’t go celebrating though. No, it isn’t your fault that you were put on the wrong tax code but you will have to pay the money back. You may be given the option of doing so in a single payment or by - you guessed it - an amendment to your tax code.
So don’t be scared if you see a BR code on your payslip – but if you now know it’s wrong, then get onto the taxman and get it sorted.
If you’re unhappy with the deductions on your payslip, we can check it out for you. We’ll check the amounts on your payslip match with what you should be paying for your tax and national insurance. You’d be amazed by the number of mistakes we see made in payroll departments. Click here for more https://www.pelicangrey.co.uk/payslip-checker