What are the impacts of tax code on my net income?

At the beginning of each tax year, taxpayers will receive a letter from HMRC telling you the tax code for this tax year.

 

A few common ones for the current tax year are:

  • 1257L – you will get the standard tax-free allowance, which is £12,570
  • 0T – no tax-free allowance
  • T – there will be numbers in front of the letter T, reduced tax-free allowance
  • BR – all income or pension from this job is taxed at basic rate, usually used if you have more than one job

 

Why do you get your tax code?

  • 1257L – the most common one, if you have one employment, no other income and the annual salary is less than £100,000. You will get the full annual personal allowance.
  • OT – If your last year’s salary was £125,000, all personal allowance was used up, or you start a new job and your employer does not have the detail yet to give you a tax code. In either case, you will have zero personal allowance in your monthly tax calculation.
  • T – your personal allowance is reduced. For example, your total income last year was £120,000. You lose £1 of personal allowance for every £2 of your income above £100,000. In this case, you lose £10,000 of the £12,500 standard allowance, and have a reduced personal allowance of £2570. Your tax code for this year will be 257T.
  • L – other than 1257L – you can get more than the standard personal allowance. For example, if you claimed the following relief in the last tax year:
    • £312 flat rate job expenses (for working from home due to Covid, £6 per week)
    • £6,000 personal pension relief (you made £9,600 additional pension contribution, that is grossed up to £12,000, and your basic rate band is expanded by that amount, resulting in a tax saving of £6,000 (you paid 20% tax on it opposed to 40% without the additional pension contribution)
    • £12,570 standard personal allowance
    • £18,882 is the sum of above
    • Your tax code will be 1888L
  • K – No personal allowance, extra amount will be added to your income for tax calculation. This happens when your salary is above £125,000 and increases year on year, but you were on a tax code that not enough tax was deducted through monthly payroll last year. The extra tax was calculated in the end of year tax return and tax paid. HMRC will assume your salary this year will be at least at last year’s level, and assign you a tax code to deduct tax through monthly payroll, rather than collecting the tax after the tax year when you file the tax return. For example,
    • Your last year’s salary was £130,000
    • Your last year’s tax code was 0T
    • £2,000 extra tax was paid through tax return
    • HMRC will collect this £2,000 with monthly payroll this year, assuming same salary as last year
    • This can be achieved by reducing your personal allowance by £11,300
    • Resulting in personal allowance of -£11,300
    • This year’s tax code is K1130X
    • This means your payroll tax will be calculated as if your salary was £11,300 more

 

Will I pay too much tax because of the less favourable tax code?

Eventually, no. during the tax year, perhaps.

For example,

If you are on the K1130X tax code this year, and leave your job in January, and start another job in April, 2022. Your total salary for this tax year will be just below £100,000. Too much tax will have been deducted for the tax year. You will be assigned a new tax code with more personal allowance to reflect the tax you overpaid, so that less tax will be deducted in your monthly payroll. Some time during 2022, you will file your tax return and claim back the tax you overpaid. Then HMRC will adjust your tax code again to be 1257L. If your salary from the new job is above £125,000 again. You will get a tax bill from your tax return for the 2022/23 tax year, and a tax code close to K1130X for the 2023/24 tax year.