Have you ever wondered what your tax code means, and why you may have a different code to your friends or colleagues, as if you have nothing else to talk about in the canteen.
Some parts of the tax code are more obvious than others but we hope that this article helps explain things so that you can understand why you are being taxed at a certain rate. Should you believe that your tax code is incorrect then you will need to contact HMRC directly as unfortunately even if your employer believes the code to be wrong they can not change it for you.
1100L is the standard tax code for most people (born after 5 April 1938) for the current (2016-17) tax year. If this is your tax code then it means that you do not pay any PAYE (tax) on the first £11,000 you earn during the year, unfortunately this allowance isn’t given all in one go, you get 1/12th of the annual allowance (approximately £916) per month tax free.
Your personal tax code could be higher or lower than 1100L dependent on your circumstances, i.e. whether you have unpaid tax from a prior year or you have tax relief due on charitable contributions.
Tax Code Letters
The letters in your tax code can mean a number of different things.
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Tax Basis M1/W1
Many individuals do not have either a M1/W1 marker against their tax code, when this is the case your taxable pay for the current year is completely recalculated each month and the amount of tax you have paid so far for the year is deducted from the total amount now due, this is known as a cumulative tax code and you receive an additional 1/12th of all allowances and bandings each month.
If you are on a M1/W1 tax code it means that only your income for that pay period is looked at in calculating the tax due on your pay, the HMRC sometimes refer to codes that are M1/W1 as being emergency tax codes.
Should you have underpaid tax earlier in the tax year or be on a K code which adds a high level of additional liability to your earnings you are protected by an automatic 50% threshold to prevent employers and pension providers from taking more than half of your pre-tax wages as tax.
Changes to tax codes
Typically tax codes only change at the beginning of a new tax year (6th April) as normally the government increases the personal allowance at this time (set to become £11,500 from 6th April 2017). However there are occasions when HMRC changes codes during the tax year, either on receipt of new information from your employer (P11D) or from yourself. If you believe that your tax code is incorrect then you need to contact HMRC directly to arrange for them to amend this. Once HMRC have amended your tax code they will usually send this directly to your payroll provider to allow your pay record to be updated. At this point dependent on the tax code and tax basis you may be lucky enough to receive a tax refund.