This is my tax code. There are many like it…without it I am useless (or Tax Codes explained)

4 years ago

Neilson Watts (Sage One)By Neilson Watts (Associate Product Manager, Sage One Payroll).

Like a US marine rifle-man’s creed, “This is my rifle. There are many like it, but this one is mine”, my tax code is my best friend. It is my life; I must master it as if it were my life.  My tax code without me is useless… without my tax code I am useless!

So what is a tax code?

I’ll admit it: tax codes are not the most exciting subject matter, but none the less they are as important to you as a rifle is to soldiers at war. They determine how much tax you should pay on your income to those nice people in suits at HMRC.

So how much can I earn before paying tax?

For most people a tax code is a number followed by a letter e.g. 944L. You can multiply the number by 10 to determine how much you can earn in the tax year before paying tax, i.e. your ‘personal allowance’ (aka ‘free pay allowance’). Therefore in this example you can earn £9440 of free pay before you will start to pay tax.

So what’s in a tax code?

Most might think you need to be a cryptologist or a man with a huge brain and forehead (just like the Tefal adverts from the 80’s) to understand your tax code, but for most people it’s really straightforward.  Most commonly issued tax codes are made up of three numbers and a specific letter depending on your circumstances:

  • The ‘L’ code – this is the most common letter and determines you are under 65 and are eligible to the basic personal allowance.  This is tax code 944L for the 2013/14 tax year. The higher the tax code, the more free pay you get and you might be lucky that you pay less tax
  • The ‘K’ code – is used to tax you on any additional income that you have not yet been taxed.  The reverse happens here, you add the personal allowance to your taxable income and then tax is worked out
  • The ‘P’ code – You were born between 6 April 1938 and 5 April 1948 and entitled to your full tax-free personal allowance
  • The ‘Y’ code – You were born before 6 April 1938 or over and entitled to your full tax-free personal allowance

I’ve got a W1/M1 after my tax code why?

Nothing related to flashing blue lights or to be overly worried about…the W1/M1 suffix (‘W’ for weekly and ‘M’ for monthly paid) after your tax code is commonly referred to as an emergency tax code e.g. 944L W1 or 944L M1.  You might be issued an emergency tax code if you’ve started a new job and have not been provided a P45 from a previous job.

For most people your tax is calculated cumulatively based on your earnings for the tax year and being on an emergency tax code simply means you will be taxed on your pay period income and not your yearly income (until a P45 has been provided).

So what if I’ve got a second job?

In your first job you will receive your personal allowances you are entitled too, but once you’ve used up these allowances, any further sources of income such as a second job will be taxed without any further free pay.

  • The ‘BR’ code – subsequent income is taxed fully at the basic rate of tax currently 20%
  • The ‘D0’ code – ‘D Zero’ code is used when subsequent income is taxed fully at the higher rate of tax…currently 40%
  • The ‘0T’ code – the ‘Zero T’ code is when subsequent income is taxed fully at the basic and higher rates of tax

What if you think I may be on the wrong tax code?

Speak to the nice people at HM Revenue & Customs (HMRC).

How does Sage One Payroll help?

1.When you enter the tax code, Sage One Payroll checks to make sure it’s in the right format
2. When you process the payroll, Sage One automatically assigns the right free pay allowance
3. When you submit to HMRC every time an employee is paid (according to new Real Time Information legislation), Sage One Payroll helps inform HMRC if the employee is on the right tax code

If you’re new to Sage One Payroll or just payroll in general, the demo video below will show you exactly how to get started using our software to pay your employees, step by step.

(Sage One Payroll is our cloud-based / online payroll software for start-ups and small businesses and costs just £5, £10 or £15 + VAT per month for up to 5, 10 or 15 ‘active’ employees).