Get to know your tax code
Every year, the amount of tax that HM Revenue & Customs (HMRC) takes from you is decided by your tax code.
This small collection of numbers and letters tells the taxman exactly how much you are allowed to earn before you are taxed and what rate you should be taxed at.
If it's wrong you could find yourself paying too much tax and fighting for a rebate or, worse still, paying too little and getting hit with an unexpected tax bill.
It is, therefore, very important that you check your tax code and make sure it is right. You can find your tax code on your P60, pay slip or your PAYE Coding Notice (usually sent out to pensioners before the start of the tax year).
Here's what to look out for to make sure you are being taxed correctly.
1. Check that all the basic information accompanying your tax code is correct.
Is your name, national insurance number and address right? Does HMRC have the correct details for your employer?
2. Is your personal allowance correct?
This is the amount you can earn each tax year before you are liable for income tax. If you only have one employer were born after 5 April 1948, it should be £9,440; if you were born between 6 April 1938 and 5 April 1948, it should be £10,500; and if you were born before 6 April 1938, it should be £10,660.
3. Finally, study the code itself.
It is usually made up of several numbers and a letter. The number, if you multiply it by 10, should come to within £9 of the amount you are entitled to earn before you pay income tax. The letter at the end relates to your tax status.
The most common are:
L – those eligible for the basic personal allowance
P – for people aged 65 to 74 and eligible for the full personal allowance
Y – for people aged 75 and over and eligible for the full personal allowance
T – used if there are other items HMRC needs to review in your tax code. For example, if you are subject to the income-related reduction of your personal allowance because you earn more than £100,000
K – used when your total allowances are less than your total deductions.
If you believe your tax code is wrong you should contact HMRC immediately.
Used by an employer or pension provider to calculate the amount of tax to deduct from pay or pension. A tax code is usually made up of several numbers followed by a letter. If you replace the letter in your tax code with ‘9’ you will get the total amount of income you can earn in a year before paying tax, for example 747L would mean a person could earn up to £7,479 before paying tax. The wrong tax code could mean a person ends up paying too much or too little tax.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.