Your ‘PAYE Coding Notice’ will tell you what your tax code is and how it’s worked out. The tax code tells your employer or pension provider what tax-free income you’re entitled to (if any) over the tax year and, as a result, how much tax to take off your income before they pay you.
This system of collecting tax is called PAYE (Pay As You Earn). Each year most people will receive, from Her Majesty’s Revenue & Customs (HMRC,) notification of their tax coding for the forthcoming tax year, accompanied by a booklet explaining how this has been worked out. These amounts may vary each year depending on your circumstances.
Coding allowances fall into two main categories, these are; Allowances and reliefs, or positive amounts; or amounts that reduce your tax-free amount, negative amounts.
Positive amounts include
Personal allowance – This is the amount of taxable income that you can receive tax-free in the current tax year
Married Couple’s Allowance (where you or your spouse or civil partner was born before 6 April 1935) is an allowance that reduces your tax if you’re a taxpayer. The note on your Coding Notice will tell you what Married Couple’s Allowance is worth to you in terms of a tax reduction and how your tax code number has been adjusted upwards to give you the correct relief.
Marriage Allowance – this lets you transfer some of your Personal Allowance to your spouse or civil partner – if they earn more than you.
This reduces their tax bill in the tax year ( 6 April to 5 April the next year)
You can backdate your claim to include any tax year since 5 April 2015 that you were eligible for Marriage Allowance
Blind persons allowance-This is an extra amount of tax-free allowance which you can claim if you’re registered with your local authority as blind or severely sight impaired , or if you live in Scotland or Northern Ireland and are unable to perform any work for which eyesight is essential. If you’re entitled to it, it should show on your Coding Notice after the Personal Allowance.
Other entries on your coding in this category may include:
- Professional subscriptions
- Flat rate job expenses (for work tools or specialist clothing)
- Other job expenses
- Payments towards a retirement annuity
- Higher rate tax relief on gift aid payments
Negative amounts
The negative entries showing on the PAYE Coding Notice take account of amounts of taxable income that HMRC believe you’ve already received or will be receiving this tax year without tax taken off. The amounts HMRC deduct ensure you pay the right amount of tax on these items.
These could include:
- Property or rental income
- Taxable company benefits – cars for example
- Other pensions or earnings
These lists are not exhaustive, but they cover some of the most common items shown on coding notices. For further information check out the web link or contact your tax office.
Codes
Tax Codes are usually made up of several numbers and letters. Where your tax code is a number followed by a letter, by multiplying the number by ten you can work out how much you are allowed to earn in a year before you start paying tax.
Letters in your tax code refer to your situation and how it affects your personal allowance.
Common tax code letters and what they mean
L –You are entitled to the standard tax-free personal allowance M – You’ve received a transfer of your partner’s Personal Allowance
N – You’ve transferred some of your Personal Allowance to your partner
S – You’re income is taxed using the rates in Scotland
T – Your tax codes includes other calculations to work out your Personal Allowance, for example it’s been reduced because your estimated annual income is more than £100,000
K – At the beginning of the tax code, indicates you have income that isn’t being taxed another way and it’s worth more than your tax-free allowance. This can happen when you’re paying tax you owe from a previous year through your wages or pension.
Or you are getting benefits you need to pay tax on e.g. state benefits or company benefits.
If your tax code has two letters but no number or is the letter ‘D’ followed by a zero, it is normally used where you have two or more sources of income and all of your allowances have been applied to the tax code and income from your main job or pension.
Emergency tax codes
W1 or M1 – If the tax office is unable to issue a full tax code due to insufficient information, you will be given an emergency tax code which will be used by your employer until the tax office issues a full PAYE code. You will usually receive a tax rebate the first time you are paid using the adjusted tax code.
Wrong information
If you think that any of the information on your Coding Notice is wrong you will need to contact your tax Office, not your employer as they are only carrying out the instruction of the tax office. If the amounts are incorrect you could end up paying too much or too little tax. Details of your tax office and how to contact them are to be found on the coding notice letter that you receive annually. It also contains other relevant information you will need for your enquiry such as your tax reference and national insurance number. If you have lost or not received a coding letter, you can carry out a search on line. If anything is incorrect HMRC will issue a new Coding Notice and tax code.
For further information on this topic you can contact your local tax office or click on the web link below.
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