How to decipher your tax code…

Hi all!

I do apologise for the lateness of my post this week. It was meant to be up yesterday but then life happened. I aim to post every 3 days for those of you who didn’t know and I was doing so well unless the last couple of weeks where I have felt so rushed. I need to get better with organising my posts and especially taking pictures due to the lack of sunlight I have now before and after work!

So on to Tax Codes

What are they? How do they determine how much tax I am deducted? Is it to do with personal allowance?

There are so many questions that can be asked about Tax codes. And honestly before I started working in Payroll I was as clueless as anyone else. So I will share with you what I have learnt and what’s most important to you as a tax payer.

Let’s start with the current personal allowance for this tax year 2014/15 which is £10,000. For those who are not sure of what personal allowance is… the HMRC allow employees to earn a certain amount of money before they start to get taxed i.e free pay. You will notice the personal allowance increases every tax year and in most cases to around £1000 more free pay.

Now a tax code is a reflection of your free pay. You will find in most cases your tax code consists of 3 – 4 numbers and a letter. The most common tax code being 1000L for 2014/15. The rule of thumb with tax codes are you multiply whatever number on your tax code by 10 to reflect the allowance. So 1000L = 1,000 x 10 = 10,000 and that will show you your free pay.

I posted about P11D’s a while ago and they are one of the most common causes of a change to your tax code. As they reclaim through tax they amend your tax code to reflect the change. (If you’d like to know more about P11D please click here for my post). So you may notice your tax code drops once P11D data has been given to HMRC.

For example…

Your benefits are worth £2,000. Your current tax code is 1000L (meaning £10,000 free pay). HMRC will minus £10,000 – £2,000 = £8,000. They will then convert the final value back into a tax code. £8,000 / 10 = 800L. So this has now reduced your personal allowance and will then create a domino effect and increase your tax payments to recover the tax due on your benefits.

Another reason for your tax code to change is if you are employed for more than one company. HMRC can split the tax code to allow you to have some free pay at both roles. So you may have a full time and a part time job. The full time could have 800L tax code and the part time 200L to allow you to have free pay at both roles but in total you will recieve £10,000 free pay.

And thats all folks! If you have any questions please don’t hesitate to ask me or good old HMRC for explanations as we are talking about your money you should know all the information!

Until next time…

Zinita x

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