Tens of thousands of people pay an incorrect amount of tax each year – and since there’s no rhyme or reason as to why errors can occur, you could very well be one of them. There are few nicer feelings than getting a cheque through the post from HM Revenue and Customs – but the key to quick rebates is knowing what to look for.
The Government’s advertisements tell you ‘tax doesn’t have to be taxing’ – but in reality, it often is. We’ll take you through some useful information and point you in the right direction if you think you might be due a rebate!
What is a tax code and why does it matter?
1150L, 1100L – these seemingly meaningless numbers actually mean a lot to the amount of tax that you pay! You can normally find your tax code on a payslip – and it’s used by your employee to calculate the amount of tax that should be deducted from your wages. Even a slight mistake can lead to big money errors!
If you don’t have a payslip to hand, you can find your tax code in a few other ways:
- P45 – You receive a P45 when you finish working for an employee. It’s the form you pass to your new employer the ensure your tax contributions are correctly accounted for when they begin to pay you.
- P60 – Each year you receive a P60 – it’s an annual statement explaining how much you’ve earned, how much tax you’ve paid.
- HM Revenue and customs – If you’re happy to call the HMRC you’ll just need to give them your national insurance number and answer a few security questions to confirm your ID – they’ll then give you tax code. A word of advice though – don’t call them on a break from work, wait times can be substantial!
What does this tax code mean?
Although it might look like a random set of numbers, it’s actually an indication of how much you can earn before paying tax. The most common UK code is 1150L – the ‘1150’ section being an abbreviated version of the £11,500 that you can earn each year before paying tax.
Beyond this tax-free amount, you’ll pay 20% tax on anything above your personal allowance up to £33,500. From £33,501 to £150,000 you’ll pay 40% tax – and anything above this is subject to 45% tax.
The letter or letters shown next to your code indicate certain elements of your circumstances. L is the most common – meaning you have a standard personal allowance, i.e. you’re under 65 and have just one job.
BR would indicate that all of your income is taxed at 20% – this would feature on the end of the tax code you would expect on payslips from a second job. If your code ends with NT that means you’re not due to pay any tax on the income that code relates to – often used if you’re not based in the UK.
Is your code correct?
Incorrect tax codes are where virtually all overpayment of tax errors occur. Knowing what yours should be is the key to working out if you’re being taxed the correct amount of money.
First of all, if your tax code is 1100L this is what’s known as an ‘emergency’ code. This is used when a new employer doesn’t receive a P45 from your previous place of work and normally rectified quickly by a payroll department. Check over your payslips, if you’ve been on an emergency code for a while, then you’re almost certainly due a rebate. If you’ve only got one job but you have a BR code – this is also an indication that there could be something wrong – check with your payroll department or give HMRC a call.
Ultimately, your tax code should make sense when compared to your circumstances and what you’re earning – and if you’re in any doubt, consulting your payroll team, HMRC or Citizens Advice can all be good ways of being certain.
What might you be due?
Tax rebates can be anything from a few pounds to thousands – it all depends on how long it’s taken for any mistake to be rectified – and given HMRC’s occasional tendency to miss mistakes for quite some time, you might be pleasantly surprised.
The good news is, claiming the overpayment back is quite easy. The best way of doing things is to call HMRC, explain to them why you believe your tax code to be wrong and leave it with them. They’ll inform you through the post whether or not your claim has been successful – it can take a couple of weeks, but it’s worth waiting if the next envelope contains a sizable cheque for you!
What if you owe money?
It’s worth mentioning that the wrong tax code can sometimes mean you owe HMRC money – but it’s always better to know this sooner rather than later – and again, given HMRC’s sometimes slow turnaround when it comes to picking up on errors, you should keep checking to make sure you’re not paying too little tax.
We admit, paying too little tax does sound good, but when HMRC catch up (and they always do) – they’ll adjust your tax code to make sure you’re paying it back. Don’t worry though, while they pay you back any rebate in a one-off cheque, they’re normally happy to stagger any repayment you have to make to them, so you definitely shouldn’t be significantly out of pocket.
Are things correct moving forward?
Understanding what your tax code should be is really useful information. The person or people who take care of paying employees in your company are likely to be well versed in what tax codes should be – and why there might be a discrepancy – so they’re good people to keep onside!
It’s well worth periodically checking that your code is right – even if you’ve had a nice rebate, there’s nothing worse than realising you’ve paid too little, after all, money is better in your pocket than anywhere else! If you’re at all uncertain, check with HMRC.