Understanding UK Income Tax Codes

Recently, with some changes at work, I’ve been thrown into the deep-end of trying to suss out the correct tax code I should have and I thought I would share the experience as well as the insight for your reading pleasure (see: sorry, it’s boring).

Before we get into it, let me give you some basic information. We’re talking about the tax code that determines just how much tax is withheld from wages; in the American vernacular, this would be what is determined when you fill out your W4 Form when you start working or have changes to your circumstances. The UK doesn’t have this form, instead it has (in my not so humble opinion) a convoluted reporting system where your work reports your information to HMRC and HMRC then tells them what they think the tax code should it – the employer may not get this information in a timely manner, and sometimes, the information from either one or both sides is incorrect and it is up to the employee to rectify it by ringing HMRC, usually by having them send a new tax code to the employer… and the cycle continues ad hoc until they get it right. Why? Because Lemmings… I seriously don’t know.

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Generally speaking, the average working person in the UK will qualify for the standard tax code 1100L (in Scotland, as of this year, that would be S1100L- because why not). What does that mean? To translate it, let’s ignore the letter for now (we’ll get back to that in a minute) and add another zero to the end of the numbers (this method holds true for most of the codes; I’ll explain the exceptions later). In this example, we go from 1100 to 11,000. £11,000 is the amount of income that is tax-free in a fiscal year for someone with tax code 1100L.

Now for the letters. As I said the average working person in the UK (and by that I mean anyone working who was born after the 5th of April, 1948) will have L as the letter, this means that they are entitled to the full basic tax-free allowance. A tax code ending in N, however, means they have given a percentage of their allowance to their partner/spouse; conversely, someone receiving that percentage would have an M at the end of their numbers. A tax code ending in T is significant in the way that it signals that there are one or more items that HMRC needs to look at to correctly calculate your tax code (one such, amusing, example is the reduction of personal allowance for people earning over £100,000 – Because, hey, that’s totally a problem that the average person faces, right?  Pft).

So far, it’s pretty simple, but like a lot of things the UK has exceptions to these basic rules and, in this case, the result is that there are also tax codes out there that have no numbers at all. Some codes may even have an X attached to the back of it; this is to signify that it should be used with payroll on either a Week 1 or Month 1 basis and not accumulative.

In conclusion, if it can’t understood by adding another 0, google-fu that thing and call HMRC because there is a possibility that it’s wrong.

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