Is your tax code correct?

The reason we have the Pay As You Earn (PAYE) system of tax collection in the UK is to enable Her Majesty's Revenue and Customs (HMRC) to deduct the correct amount of tax from employed people at source.

This means that they should be able to avoid excess bureaucracy necessitated by having to give tax refunds. This also reduces the need for, and frequency of, HMRC tax investigations. 

In order for this system to function correctly, employers use tax codes to work out how much money to deduct from their employee's earnings for tax. It is important that individuals ensure that their PAYE tax code is correct and up to date. This can be found on every pay slip and the codes correspond to the information below.

S - this prefix applies to all tax codes in Scotland

L - includes the basic personal allowance
N - taxpayers in receipt of Marriage Allowance who have transferred 10% of their Personal Allowance to their partner

M - taxpayers who are 'recipients' of the Marriage Allowance
T - there is usually an adjustment in your code which requires manual checking by HMRC each year – for example, you might have a tax underpayment being 'coded out'
K - HMRC may try to increase the tax you pay on one source of income to cover the tax due on another source which cannot be taxed directly. A 'K' code applies when the 'other income' adjustment reduces your allowances to less than zero. This allows HMRC to tax all of your income with your employer rather than disregard the first £12,570 of your personal allowance. 

The maximum tax which can be deducted is 50% of the source income. HMRC will often try to collect tax on other income through your PAYE code, but you may prefer to pay the tax through self-assessment instead. 

An employee can make any HMRC tax enquiries either through their accountant or directly with HMRC. It is much easier to resolve any issues during the financial year than to try to get a tax refund at a later date.

Taxable Benefits

It should also be noted that there are some taxable benefits in the UK including Carer's Allowance, Job Seekers Allowance and Employment Support Allowance that may be factored into the calculations made by HMRC.

This may cause them to recalculate the amount of money that is due in real-time in the current financial year. This is referred to as “Dynamic Coding”.

Dynamic Coding

HMRC uses information received from employers, such as notification of a new benefit, to recalculate employee tax codes in real-time. Where a potential underpayment is identified, HMRC makes an in-year adjustment to the code for the current tax year (so-called 'dynamic coding'), rather than waiting until the following tax year.

For more information on this, please contact us, as we can assist with all enquiries and questions relating to the application of tax codes and how they will impact on your