Learning the tax code alphabet
WITH a new financial year just around the corner, millions are receiving new tax codes. This is the first of a two-part guide from www.lovemoney.com ensuring that you are on the correct code and that you aren't paying too much - or too little.
This Friday, April 6, a new financial year will dawn. And in the run-up to this date, millions of people should have received new tax codes.
The ins and outs of tax codes may not be the most fascinating of topic, but it is important. If you are on the wrong code you could find yourself underpaying throughout the year and be hit with a huge bill come 2013, or be overcharged and left out of pocket each month.
If you have recently changed jobs or gained a new source of income, you should be especially vigilant. Here is what you need to know:
* The L code
Tax codes are usually made up of a series of numbers and a letter.
The most common letter is L, which means that you are under 65 and eligible for the basic personal allowance - this is the amount you can earn before income tax kicks in. The basic personal allowance for 2012-13, applicable to low and middle earners with an annual income of less than £100,000, is £8,105.
This exact allowance figure (divided by 10) will precede the letter in your code. So for the 2012-13 financial year starting this week, 810L will be one of the most common codes - indicating that you are entitled to a £8,105 personal allowance.
* The K code
The K code is essentially the reverse of an L code and is used when your level of untaxed additional income exceeds your personal allowance.
This additional income is often in the form of employee benefits and eats away at your personal allowance.
Consider this example: your employer provides you with a company car to use both on the job and at home. Petrol, licensing and tax are paid for, even personal journeys so the taxman will view this as a form of income and will cut it from your personal allowance. This will give you a tax code that still ends in L, but has a smaller figure preceding it. So if the taxman decided that you were getting £5,000 of income from your company car, your code would be 310L (£8,105 - £5,000 = £3,105 or 310).
However, if this additional income exceeds your personal allowance, wiping it out completely, you'll be shunted onto a K code.
Continuing the example - if your additional income is £15,000, you will see 689K as your tax code. This means that you need to pay income tax on all of your earnings, plus the £6,895 additional income from the company car.
* The T code
For high-earners, you will lose £1 of your personal allowance for every £2 you earn over £100,000. At this point you will be on a T code, preceded by a figure showing the level of allowance you have left. For example, someone with an income of £110,000 will see a 310T code and when your income reaches £116,210, you will lose all of your allowance.
If you think your tax code is wrong tell HMRC as soon as possible so it can be corrected. You will need to have your tax reference and National Insurance - which can be found on your payslip.
To find out more about tax codes for pensioners and second jobs, in addition to emergency taxation, see next week's recruitment page or visit www.hmrc.gov.uk
This article appeared in Bracknell News 04 Apr 12