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Each year citizens of the United Kingdom have to hand back a share of their income and earnings to the government for helping it carry out its functions and giving back to society. The taxpayers of the UK are segregated into different tax codes or categories, if you will, to differentiate among them based on inequality and their circumstances.
If you are a citizen of the UK, you need to understand these tax codes If you are a citizen of the UK, you should know what these tax codes are and their meaning. this blog enlisted with a list of tax codes and what they mean. below is a list of the tax codes that the government has created to simplify its tax collection task.
Decoding your tax code
A typical tax code of a taxpayer in the UK consists of the number and letters that signify things like how much of your income is tax-free, what amount of tax you need to pay above your personal allowance, and whether or not any other situations need to be considered.
Numbers:- The numbers in the tax code lets your employer or pension provider understand what fraction of your income will be tax-free.
Letters:- The letters that you see in your payslip describe details about your employment situation and your current tax payment situation. It provides the correct idea to the employers as to what amount of tax has to be taken from your day slip.
List of Tax codes
1. L – Common tax
It is the most commonly given tax code to citizens in the UK. It indicates that a particular person is eligible for a standard tax-free allowance. This tax code includes the majority of middle or low-income earners with annual earnings of less than £100,000. These people are given a basic personal allowance for each year.
For the year 2021-22, the allowance amount is £12,570. The tax code would be 1257L which will be the most commonly given out tax code by the government.
2. M & N – Marriage taxes
M – An M code is a marriage allowance provided by the DVLA. It indicates that your spouse has transferred ten percent of their personal allowance to you. You can only pass ten percent of the allowance if your income is less than the personal allowance.
N – This code is also a marriage allowance, and it means that you have transferred your spouse ten percent of your income.
3. T & oT – High earner’s tax
It is a form of tax levied on people who earn £100,000 or more in a year. At this point, managing your taxes becomes a bit more complicated because there are additional taxes and charges added to find out your personal allowance.
T – In this tax code, you will lose £1 of your personal allowance for every £2 you earn over the amount of £100,000. It means you are put under the implication of the tax code T.
oT – When an individual’s income crosses the threshold of £125,140, they are bound to pay a tax on their entire income and do not get a personal allowance. It would mean that they are in the oT code.
4. N – The no tax code
If your income is not high enough to put you in any other tax code, then it will employ that you will not be charged with any taxes. It can happen when one’s income is less than the dedicated personal allowance amount decided by the government. Another way you can be in this code is because you are an independent contractor who is supposed to pay national insurances instead of Income-tax.
5. BR, D – Second jobs and pension tax
The HMRC will be asking you if you have more than one source of income on which is your primary source of income, and they will accordingly adjust your personal allowance.
BR – It is short for ‘basic rate’ and indicates that the HMRC will subject you to no personal allowances but cannot be subject to higher tax rates.
D – It indicates different bands of taxes segregated in levels. D0 means a band over the BR. D1 implies a level of the band above D0.
6. W1 & M1 – Emergency codes
Emergency codes are levied when the HRMC doesn’t have enough details about your income. Therefore, you will be charged with a temporary tax code. The W and M signify whether the tax will be applied weekly or monthly.
7. K – Untaxed income
This code accounts for any untaxed benefits or income you might be getting from your employer. But this tax code will only apply to you if those benefits or income increase the personal allowance amount.
For example, if your company provides you with a company car worth more than the personal allowance amount, you would see that you are no longer in the L code; instead, now you are put under the K code.
All of your additional income from the company car that exceeds your personal allowance would be subjected to a tax. On top of that, you will also need to pay taxes on all your actual earnings.
Interestingly, if you are getting an untaxed income from your company but It doesn’t exceed the limit of your personal allowance. The HMRC (Her Majesty’s Revenue and Customs) will reduce it from the amount of your personal allowance. It implies that you would still be in the L code, but you will be subjected to the remainder of your personal allowance instead of getting a full personal allowance.
If you get a company car worth £4,000, it will be deducted from the £12,570 worth of personal allowance, and now you will see your code being 857L. (£12,570 – £4,000 = £8,570).
What can you do if you are in the wrong code?
Now that you understand your tax codes, you should immediately contact the HMRC by any medium like the post, email, or phone if you think you are being wrongly taxed.
You should ensure reporting the issue because you can be unknowingly paying more tax than you are supposed to, it can be bad for your financial situation, and you may be able to get relief from the HMRC.