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Check you’re on the right tax code to avoid an unexpected tax bill

Tax codes for the 2023–2024
tax year, which begins on 6th April 2023, have already been issued for most employees and directors.

Employers will use these codes to collect Income Tax
and National Insurance Contributions through PAYE – but what if you’ve been assigned the wrong tax code?

This could result in you paying too much tax, which can affect your monthly budgeting, or paying too little tax, which could lead to an unexpected Income Tax bill.

The last thing anyone wants is to overpay tax and have to fight for a refund, or to underpay tax and suddenly owe significant back payments.

Here’s what you should know to make sure you’re on the right tax code and paying the appropriate amount of Income Tax in 2023.

Income Tax codes and allowances

In the UK (excluding Scotland), Income Tax is charged as a percentage of an individual’s earnings from employment and/or profits from self-employment. It may also be due on some pensions, savings, and investments.

Everyone has a Personal Allowance of £12,570, which is the amount you can earn tax-free. Any income or profits over this amount are liable for Income Tax at progressive rates:

  • 20% basic rate on earnings between £12,571–£50,270 a year
  • 40% higher rate on earnings between £50,271–£125,140 a year
  • 45% additional rate on earnings above £125,140 a year

The new tax year sees the upper threshold of the higher rate and the lower threshold of the additional rate drop from the previous £150,000 to £125,140 – this is because your Personal Allowance is reduced by £1 for every £2 you earn above £100,000.

This means that some higher earners will be pushed into the additional rate tax band and receive a new tax code. The threshold for basic rate tax and the lower threshold for higher rate tax have been frozen until 2028, which also means that lower earners may be pushed into a higher tax bracket as wages increase.

What is my tax code?

HMRC assigns every employed earner a tax code, which employers and pension providers use to deduct the appropriate amounts of Income Tax from the earner’s pay or pension. This code is made of numbers and letters that indicate your tax allowances, based on your circumstances.

The most common tax code is 1257L, which indicates that the earner is entitled to the standard £12,570 tax-free allowance. This applies to most people in employment with one job – but if you have more than one job or pension, you’re likely to have more than one tax code.

You can find your tax code on your payslips, coding notices from HMRC, P60s at the end of the tax year, P45s when changing jobs, and in your personal information in the HMRC app.

If you aren’t sure what the letters at the end mean, you can check this tax code letters guide. The letters should indicate whether you’re entitled to the full Personal Allowance, which rate of Income Tax you’re paying on this income stream, and whether you’re using a Marriage Allowance.

Why is my tax code wrong?

Ending up on the wrong tax code invariably means paying the wrong amount of tax, and while HMRC’s mistake is a hassle for the taxpayer, it’s actually the individual’s responsibility to check they’re on the right code and notify HMRC if there’s an issue.

There are many reasons why you may be on the wrong tax code, and why HMRC might update your tax code incorrectly at the start of a new tax year – such as:

  • Your wages/salary have increased or decreased
  • You started a new job, but your employer hasn’t received your P45 yet
  • You’ve switched from self-employment to working for an employer
  • You’ve started receiving more income from a second job or pension
  • You began or stopped receiving taxable state benefits or company benefits

This usually happens because HMRC has outdated information about your income and allowances, which affects their ability to calculate your current tax liabilities. Allowable expenses and taxable benefits can change from year to year, so it’s important to make sure your employer keeps their PAYE system up to date.

Emergency tax codes

If your employment circumstances or income level change, but HMRC doesn’t receive enough information about this to adjust your tax liabilities, then you may be given an emergency tax code.

If your tax code ends in W1, M1, or X, you could be paying emergency tax. Meaning everything earned above the Personal Allowance is taxed, without accounting for any other allowances or benefits you may be entitled to.

This is usually only temporary, as HMRC should adjust your tax code as soon as they receive up-to-date information about your change in circumstances, but it can still cause cashflow problems for taxpayers. If your changing circumstances mean you haven’t been paying the correct amount of tax, you’ll stay on the emergency code until you’ve caught up.

If your tax code ends in K, this isn’t an emergency code, but it does mean that you have taxable income worth more than the Personal Allowance from another source that is now being taxed through PAYE. For example, repaying previously owed tax through your wages or pension, or receiving taxable benefits (state or company). No more than half of your pre-tax wage or pension can be taken when you have a K tax code.

What to do if you’re on the wrong tax code

In most cases, your employer should supply the updated information to HMRC when your circumstances change, and HMRC will then update your tax code automatically. When this doesn’t happen, you’re highly likely to end up on the wrong code, so it’s worth checking your tax code sooner rather than later.

You can view your current tax information by logging into your personal tax account with your Government Gateway ID, or using the HMRC app. If you are worried that you have the wrong tax code, you can use the ‘check your income tax’ service on the government website to make sure your employment details are correct.

You can also use this service to update HMRC with your current employment details and notify them of any income changes that may have affected your tax code. Alternatively, you can do this by contacting HMRC directly – you may be asked to provide details of your annual income and any benefits or pension payments you receive.

If your tax code needs to be changed, HMRC will contact you and your employer and/or pension provider with the revised code. This should show on your next payslip, along with any adjustments to your pay if you had been paying the wrong amount of tax.

The tax agency should send you either a P800 tax calculation letter or a Simple Assessment letter to notify you if you’ve been paying too much or too little tax. If you’ve overpaid, you could receive a refund via a tax deduction for the current year, or a cheque for previous years. If you’ve overpaid, you’ll either receive an outstanding tax bill to pay, or be put on an emergency tax code until you’ve paid off the outstanding Income Tax.

Save money with efficient tax management

With fiscal drag pulling more and more people into a higher tax band, and the cost of living crisis cutting into budgets across the country, it’s not a good time to find out you haven’t been paying enough tax because you’re on the wrong tax code.

Of course, it would be a great time to find out you’ve been overpaying, and are actually due a tax rebate instead – but either way, you won’t find out unless you check your personal tax account and stay on top of your tax code information.

Do you need help managing your tax affairs? Whether you’re an individual dealing with a HMRC enquiry
over a tax code dispute or an employer looking to outsource payroll services
for more efficient management, our accountants in Leeds and Barnsley
could provide a solution.

Contact us on 01226 298 298 or at info@gbac.co.uk
to speak to GBAC, accountants in Barnsley, team today, and find out how our tax planning services could benefit you.