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Are you paying too much tax?

Thousands of people across the UK are paying more tax than they need to, are you one of them? We explain how to check and challenge your tax code.

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It may seem like your tax code is just a random assortment of letters and numbers, but if you have been allocated the wrong tax code you could be paying the tax man more cash than you need too.

Here is how to check you are on the right tax code and get it changed if you are not.

What is a tax code?

Everyone who is employed, be it full or part-time work, or receives a private pension is assigned a tax code.

Your tax code tells your employer or pension provider how much tax needs to be deducted from your gross salary before it is paid into your account.

If you have been assigned the wrong code you could be paying hundreds, or possibly even thousands of pounds extra in tax.

Where can I find my tax code?

Your tax code should be clearly printed on your pay slip, if you have more than one job you may have two different tax codes.

You should also be able to find your main tax code on your P60 or on your annual notification letter from HMRC.

Most tax codes are made up of a letter and two or three numbers i.e. 647L, although some codes may just have letters i.e. BR.

Why might your tax code be wrong?

There are several situations which could result in you being assigned the wrong tax code, here are the most common:

  • You changed your job. If you have recently changed jobs or are still waiting for a P45 from your previous employer, then you could have been given the wrong tax code. This can happen as the tax office will be unaware that you have finished you previous job so they will consider your new one a second source of income and tax you accordingly.

    You may also be put on an emergency tax code in this situation, until an accurate tax code is assigned.

  • Your state benefits change. State benefits are not taxed, however, they often take up part of your Personal Allowance, which can impact your tax code. If the benefits you receive change then so could your tax-free earnings entitlement which is used to determine your tax code.

  • Your company benefits change. Certain benefits you get from your employer, such as a company car, gym membership or health insurance, are considered taxable. If you start receiving, or have a change in any of the benefits you receive it may affect your tax code.

If any of these circumstances apply then you should make sure you check you tax code as soon as possible. However, even if you have not, it still makes financial sense to confirm your tax code is correct.

Learn more about emergency tax codes here

How to check your tax code is right

Remember that you need to check both the letters and numbers are correct on your tax code, as both affect how much tax you pay.

Your tax code is determined by a number of factors including your age, health benefits, marital and employment status.

Most tax codes consist of letters and numbers.

  • The numbers indicate your tax-free allowance for the year.

  • The letters relate to your specific tax type and what type of work you are doing.

Here are some of the most common tax codes and what they mean:

  • L - The most common tax code for people who are working and entitled to the basic tax-free Personal Allowance.

  • M - Used for an employee whose spouse or civil partner has transferred some of their Personal Allowance

  • N - Used for for an employee who has transferred some of their Personal Allowance to their spouse or civil partner

  • T - Used when HMRC needs to review some items with the employee

  • K - This code indicates that the tax-free benefits you receive are greater than your annual Personal allowance. As a result you will pay the extra tax due from your benefits through your income.

  • 0T -  Used when an employee hasn’t given you a P45 or enough details to work out their tax code, or when their Personal Allowance has been used up

Tax codes for second jobs

When starting a new job you may be placed on the BR tax code if you do not submit a P45 or P46, as the tax office may assume you have started a second job.

  • BR - This tax code is usually used for a second job or pension rather than your main source of income and means that your whole income is being tax at the basic tax rate of 20%.

  • D0 - This also tends to apply to second jobs, but the D0 code is for anyone who falls into the higher income tax bracket. If this code appears on your payslip, all of your income is being tax at 40%.

  • NT - Stands for No Tax and indicates that no tax is being taken from your income; this may apply to full time university students who only work during the holidays or in some cases those who work abroad.

The most common tax code for the 2021/22 tax year is 1257L. It applies to most people who have one job and no untaxed income, unpaid tax, or taxable benefits.

Your Personal Allowance

Once you have checked you are on the correct type of tax code, you will need to calculate your Personal Allowance, this is the amount of money you can earn each year before being taxed.

Assuming you do not have a BRD0 or NT code, your current tax code will include numbers relating to your annual personal allowance.

The Personal Allowance for the tax year 2021/22 is £12,570, however this figure begins to diminish once your income rises above £100,000.

Your allowance will drop by £1 for every £2 you earn in excess of £100,000. This means your allowance is zero if your income is £125,140 or above.

If you earn over the limit, or are registered blind you can check your Personal Allowance entitlement on the Gov.uk website.

Working from home

UK taxpayers who work from home full or part-time are able to claim extra tax relief using HMRC’s online portal.

The relief is worth £6 a week and you do not need to provide receipts or detailed expenses to claim.

To claim you will need to have been told by your employer to work from home. You will also need to have not received any direct payments from your employer related to working from home.

Claiming will alter your tax code, meaning basic rate taxpayers who claim the full £6 a week would see their take-home pay increase by £1.20 per week. This is because you will not be paying tax on an extra £6 of your earnings, and £1.20 is 20% of £6.

Why is my tax code number different to my personal allowance?

Your tax code can also be influenced by the benefits you receive through work such as a company car or health insurance.

For more information to work out how company benefits influence you tax code visit the GOV.UK website.

You can also use the 'company car and car fuel benefit calculator' on the GOV.UK website for help working out how much taxable value your company car is considered to have

GOV.UK company and car fuel benefit calculator

How to get your tax back

If you believe that you are on the wrong tax code then you should contact your tax office to ask for a tax assessment.

Be prepared

When you contact the tax office you will need your tax reference and National Insurance number at hand, both of which can be found on your payslip.

If you are over-paying tax you will be able to claim a rebate. Your local tax office will let you know which documents they need to process your rebate; this will usually include your P60.

HMRC will also check your previous year's contributions during your assessment, but if you think you are owed money further back than this you can claim up to 4 years of over payments.

Equally, if you are not paying enough tax you should inform the tax office as soon as possible, the longer you leave it the more you will have to pay back!

Visit the HMRC website here

Get help from an expert

Tax can be a complicated and frustrating topic at times. However, if you are struggling there are several places you can turn to for help:

TaxAid is a UK charity specifically dedicated to helping people resolve their tax issues. If you are retired TaxHelp for Older People is an independent tax advice service for the elderly.

Be warned: There are several companies which offer to submit your tax rebate request on your behalf. However, keep in mind that although you will not have to chase HMRC yourself, you will have to pay a fee which can be avoided if you contact HMRC directly

Maximise the value of your savings by hunting down the best rates available.