Tax Codes: Understanding them, using them and avoiding related furlough problems.


The thorny subject of tax will be at the forefront of Government policy for years to come once Britain's lockdown restrictions are lifted and the pandemic subsides.

Taxpayers will be left bearing the brunt of the economic fallout from Covid-19, which has seen mass pay cuts, job losses, furloughing and vast loans dished out to businesses by the Government.


Some experts are predicting that income tax and tax for the self-employed could go up in future, while others believe the triple lock on pensions could be broken.For the moment, we are still in the early stages of the new tax year and it pays to know what to look out for on your payslip to ensure you are paying no more tax than you need to.



What is a tax code?

The new tax year started on 6 April and millions of UK full-time and part-time workers and those with a private employer pension have been issued with a tax code.


This short configuration of numbers and letters might look harmless enough, but if it is wrong you could end up paying hundreds or thousands of pounds more in tax to HM Revenue & Customs than you need to. The numbers and letters comprising a tax code determine how much tax you pay and how much money will be deducted from your pay before it even hits your bank account or pension pot.


You should be able to find your tax code on your payslip, as well as your annual P60 tax summary and, if you leave a job, your P45 form. If you are receiving a private pension, you should get an end of year certificate from your pension provider telling you what tax code they are using.

What is this year's most common tax code?

This year, the most common tax code in the country is 1250L.


The 1250 part of this means that you have a tax-free allowance of £12,500 for the year. Put simply, you can earn £12,500 before HMRC starts taking its cut.


Personal allowances vary and can be more than this, if, for example, you claim Blind Person's Allowance or Marriage Allowance.


The amount of income tax you pay, however, will also depend on how much money you earn. Taxpayers currently pay an income tax rate of 20 per cent tax on the portion of their income between £1 and £37,500 above their personal allowance.


In the band above this, people pay an income tax rate of 40 per cent on the portion of their annual salary between £37,501 and above, up to £150,000.


For £150,000 or more, the income tax rate is 45 per cent, and people earning £125,000 or more a year do not get an annual personal allowance.

What do the letters mean?

Now that we know what the numerical part of the most common tax code means, what about the letter or letters after it?


These can refer to a number of factors, but generally refers to someone's age and what rate their employment is taxed at.


'L' is the most common letter in tax codes used this year and means someone is eligible for the standard £12,500 personal allowance.


Meanwhile, a number and a letter 'T' means your tax code includes other elements such as a company car benefit, which would restrict your personal allowance.


'0T' means your annual personal allowance has been used up so you start paying tax at the basic rate on your income.


'This code is often used if you have started a new job and your employer does not have the details they need to give you a tax code,' said PwC tax specialist Quentin Holt.

The tax code letters 'BR' means someone's entire income is taxed at the 20 per cent basic rate. This is often used on second jobs or pensions.


If you see 'K' plus a number on your tax code it usually means your personal allowance has been used up and your code is collecting additional tax due on other taxable benefits, or tax you should have paid in years gone by.


In another configuration to get your head round, PwC's Mr Holt said: 'If you have W1 (Week 1) or M1 (Month 1) at the end of your code, this means that you are not being taxed cumulatively but only on the amount you have earned that week or month.


'This means that the coding cannot adjust your withholding for changes in circumstances or errors from earlier in the tax year so your final tax position at year end could well be wrong.'


Finally, if you see the letters 'NT' at the end of your tax code, lucky you, it means no tax will be deducted from the income stream in question. This is often used for people living and working abroad.