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A short and useful guide to tax Codes

March 29, 2018

The end of the 2017-18 tax year is upon us! But what does this actually mean?

 If you are self-employed, it means you should probably make sure you are at least aware of where you have stashed your receipts since 6 April 2016. You should maybe think about registering for self-assessment, or plan when and how you are going to get the return completed. (See previous blogs on self-assessments for more info.)

 

If you are an employee - of your own company, or of anyone else's, there are two things that will shortly happen:

 

1. You will receive a P60. This is a statement of all the money you have earned through payroll in the tax year. Your employer is obligated to provide this to you by 31 May 2018. If you have changed employer in the year, you will receive this from the employer you are with when the payroll year ends e.g. 5 April 2018.

 

2. You will receive an updated tax code from HMRC which determines the tax you will pay on your payroll earnings in the new tax year.

 

As you will probably be aware, income tax is calculated based on bandings*. For 2018-19 you get a "personal allowance" of £11,850 which is tax free. After this, you are taxed at 20% up to £46,350 income then at 40% (or more, if you are lucky enough to earn well into 6 figures!) When you are on a payroll, you are part of the Pay-As-You-Earn (PAYE) system meaning you pay your tax in instalments as you are paid each month. Your monthly tax can vary as your salary varies, or if something particular changes in your circumstances - and this is all driven by your tax code.

 

The tax-free personal allowance you are entitled to can be affected by a number of things, such as an over or underpayment in previous years, whether you are on "emergency" tax (happens if you have multiple jobs, or if HMRC can't confirm your PAYE history). If you have a standard personal allowance of £11,850 and nothing weird it outstanding, your tax code will end in "L".

 

Things to look out for in your tax code:

If you have a "0" or a "D" in it e.g. D0, D1 or 0T. This indicates that you have no personal allowance left, or HMRC think you are going to earn over £100,000 in the year. If this is not the case, call them and query it as soon as possible or you will get taxed heavily through the payroll.

 

BR means that everything is being taxed at the "Basic Rate" which is 20%. Common where two jobs are held. If you don't have two jobs - query it!

 

W1 or M1 or a combination of the two - these are emergency tax codes and shouldn't be on your payslip for more than your first month or so of employment. Query them!

 

A tax code with a "K" in it indicates you have something weird going on, related to your personal circumstances. This may be an over or underpayment from a previous year that is being recovered, or it might relate to benefits you are in receipt of.

 

If you think you are on the wrong tax code contact HMRC here  or on 0300 200 3300. As ever, best to call first thing with HMRC and preferably not near a big tax deadline!

 

 There is more information on this available on HMRC's website here

 

 

 

* in my blog on director remuneration, I stated that a salary of £680 per month was the most tax efficient way of remunerating yourself as a sole Director. For 2018-19 this has increased to £702 per month. ROCK AND ROLL!

 

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