Crack your (bamboozling) tax code to stop HMRC feasting on your cash

Follow our guide to the Revenue’s jargon and you may even find you’re owed a refund

Trying to understand your tax code is rather like attempting to translate Latin if you’ve never been taught the language. But failing to decipher the alphabet soup of letters and numbers sent by HM Revenue & Customs could leave you seriously out of pocket if the wrong amount of tax is taken from your pay or pension.

The start of the new financial year on April 6 means new tax codes for the 41m people in the pay as you earn (PAYE) system. These mysterious combinations of letters and numbers tell your employer or pension company how much income tax to subtract before you get your hands on your money.

The scary thing? It is your responsibility to ensure your tax code is correct, and you should not assume the taxman has magically got it right. Circumstances change — you may have switched jobs, gone on maternity or paternity leave, ditched private medical insurance or retired — so codes may not be up to date.

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, said: “It’s critical that people check their code, because HMRC don’t always get it right, and you could well get a repayment. Otherwise, now that so many people are not required to file self-assessment tax returns, errors might never be picked up.”

So dig out that tax code letter you put to one side promising you would check it later, or find the tax code printed on your pay slip. You can also find your tax code online at gov.uk/personal-tax-account if you have a Government Gateway login.

Just to complicate matters, if you have more than one job or pension, you should have different codes for each one.

Here is our guide to how to crack your tax code.

What do the numbers mean?
These show how much income you can earn before paying tax.

It would be too easy to put the actual amount, so the taxman knocks off the last digit. If you want to check what you can earn tax free, add a zero to the end.

For example, if your tax code is 1150L — the most common one for this tax year — you can earn the standard personal allowance of £11,500 between April 6, 2017, and April 5, 2018, without paying a penny in tax.

. . . and the letters?
These are abbreviations that give further clues to your tax status. If BR appears beside the number, for example, it means all income from this job or pension is subject to tax, at the basic rate of 20%. You should see this code only if you have more than one source of income, perhaps a second job or a pension, as it means your tax-free allowances have already been used up elsewhere.

D0
Hard luck. The higher rate of income tax, currently 40%, will be levied on all income from this source.

D1
All income from this source will be subject to additional-rate tax, so HMRC will lop off 45%.

K
Harsh and, fortunately, rare. This means the tax you need to pay is higher than the personal allowance. You may, for example, still be paying tax from a previous year or owe tax on benefits such as the state pension or a company car. In this case, the numbers show the tax owed, rather than the tax-free money you can receive.

L
This is the letter most people see. Congratulations: you are entitled to the standard tax-free personal allowance.

M
Refers to the marriage allowance. You pay less tax because your spouse or civil partner has transferred 10% (£1,150) of their personal allowance to you. To be able to do so, they must not work or earn less than £11,500, and you must be a basic-rate taxpayer.

N
This also refers to the marriage allowance but shows you’re the one making the transfer.

NT
Bingo — you win the tax code lottery. Any income from this source won’t be taxed at all.

0T
Your personal allowance has been used up. This also appears if you have started a new job and don’t have a P45 from your former employer, or you have not given your new employer the information it needs to work out how much tax you should pay.

S
You will be taxed at the rates in Scotland and part of your tax will go to the Scottish government. Since April 6 this year, the higher-rate tax threshold in Scotland has been lower than in the rest of the UK. It kicks in at £43,001 rather than £45,001.

T
This means your tax code includes other calculations to work out your personal allowance. For example, it might have been reduced because your estimated annual income is over £100,000.

M1
An emergency tax code, seen if you have recently changed jobs and are paid monthly. Your tax will be based on that month rather than the full tax year. Make sure your new employer has your P45 so the code can be updated.

W1
Another emergency code, used if you are paid weekly. Again, check your employer has your P45 for updating your code.

How can I raise my tax-free bounty?
There are various ways to increase the amount of income you can earn free of tax. Here are some of them.

Get married
As mentioned above, spouses or civil partners can transfer 10% of their personal allowance. The marriage allowance can be backdated, cutting the recipient’s tax bill by £230 this tax year, £220 in 2016-17 and £212 the previous year. For full details, go to gov.uk/apply-marriage-allowance. The system is different for those born before April 6, 1935.

Give to charity — or pay into a pension
If you contribute to a pension, your provider will automatically add tax relief at the basic rate. However, higher and additional-rate taxpayers can claim extra relief through a tax rebate or through their tax code.

High earners who donate to charity using Gift Aid can reclaim the difference between basic-rate tax and their top rate in the same ways.

HMRC is likely to set future tax codes assuming the same level of contributions, so if you make a one-off pension payment or charitable donation, tell the taxman it will not be repeated.

Save and invest
Two new allowances were created last April for savings and dividend income.

The personal savings allowance allows basic-rate taxpayers to earn £1,000 interest tax free. The allowance is £500 for higher-rate taxpayers and zero for additional-rate payers. Also, if your total taxable income is less than £17,000, you won’t pay any tax on savings interest.

However, if your income tops £17,000 and your interest earned exceeds your personal savings allowance, HMRC may change your code to collect the tax owed.

Robin Williamson of the Low Incomes Tax Reform Group, a lobby organisation, warned that problems may arise if you earn extra interest in a single year — if a bond matures, for example. “HMRC may include the same amount of interest when calculating your tax code for the following year, so you could end up being charged tax that you don’t actually owe,” said Williamson.

The dividend allowance lets you earn up to £5,000 in share dividends this year without paying tax. Blink and you’ll miss it, though: the limit will be cut to £2,000 for the 2018-19 tax year. For dividend payments up to £10,000, any tax owing can be collected through your tax code.

As always, you won’t pay tax on interest or dividends from money in an Isa.

Sell things on eBay
Two more allowances were introduced this month, for trading and property income. You can now earn £1,000 tax free each year from trading, such as selling items on eBay or Etsy, or providing services such as cleaning or dog-walking.

You can also make £1,000 tax free from your property, including charging people rent to park on your drive, or letting a room through Airbnb.

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