When was the last time you checked that you were on the right tax code?
It seems insignificant, but those little letters and numbers in the tax code box on your payslip can actually make a big difference to your pay. Your tax code dictates how much money an employer will deduct from your salary, if you are on the wrong tax code then the wrong amount will be deducted. Which is bad enough until the tax man catches up with you. You might be lucky enough to be owed money (hooray!) but it's a nasty shock when you haven't paid enough tax and you receive a letter telling you how much extra is going to be taken from your salary to pay the bill.
But of course, HMRC don't exactly make your tax code easy to understand
Your tax code is made up of a string of numbers and letters that tell your employer how to calculate the tax that you should pay. Everyone has an annual tax-free allowance (the amount you can earn each year that will not be taxed) and for most people in 2017-2018 this is £11,500. Everything you earn above this is taxed. However there are lots of factors that affect how much tax you should pay. The person who calculates your pay each month needs to know how much you get tax-free, and at what rate they should tax the rest of what you earn. So they use your tax code.
One of the more common tax codes for 2017-2018 is 1150L. Most employees will be on this tax code.
The number in your tax code tells your employer how much you should be paid tax-free. Take the number in your tax code and multiply it by 10. This is your tax free allowance. i.e. 1150 in your tax code becomes £11,500.
The letter in your tax code gives your employer more detail about how to tax what you earn over this amount.
1150L is the general tax code for 2017-2018. It shows that you should be taxed at normal rates (the “L” part) and that your tax-free annual allowance is £11,500 (the “1150” bit). Your tax code will be 1150L if you were born after 5th April 1948, paid the correct amount of tax last year, this is your main source of income, and you don’t receive any work benefits such as a car or health insurance.
However, there are other tax codes for different circumstances.
If you receive any tax allowances, paid too little tax last year, are claiming your pension, have a second income or receive any other benefits, then your tax code may be different to 1150L.
We've produced a full guide on tax codes designed to help employees to find out more about tax codes and to check their own tax code.
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Categories: Financial Education