It is vital that when you are paying employees through the PAYE system, you are using up to date information from the HMRC on tax codes. This is all to make sure that your employees are receiving the correct amount and that the correct Income Tax is deducted.
Need some help? Here are some of the different tax codes that you might encounter and some situations when an employee’s tax code could change…
Tax codes: The Basics
If you are looking for tax codes, they can all be found on the government website. Every codes will consist of an arrangement of numbers and letters.
Numbers:
The amount of income an employee can earn before paying Income Tax is demonstrated in the numbers of a tax code. For many, this amount of income is based on their national Personal Allowance. For the current tax year, this is £12,570, so the tax code is 1257.
Any income above your personal allowance will be taxed at your relevant rate of Income Tax.
Letters:
The most common code is 1257L. It applies to employees with one job, no untaxed income, unpaid tax or taxable benefits.
If a different letter follows the set of numbers, then a different amount of income tax must be deducted.
Here are some of those letters:
BR – When the employee has additional income from a second job or a pension. Income Tax is deducted at the basic rate if the total income falls into the basic rate tax band.
D0 – When the employee has additional income from a second job or a pension. Income Tax is deducted at the higher rate if total income falls into a higher tax band.
D1 – When the employee has additional income from a second job or a pension. Income Tax is deducted at the highest rate if total income falls into the highest tax band.
K – When the employee has income that is not being taxed another way and is worth more than the tax-free allowance. Theis might include paying Income Tax owed from a previous year or receiving state benefits or company benefits. Income Tax Is deducted on the income that has not been taxed at the basic, higher or highest rate. The number that follows K is multiplied by 10, and is then added to the employee’s income. Income Tax is then deducted on the total amount at the basic, higher or highest rate.
L – When the employee has the standard Personal Allowance with no other source of income. Income Tax is deducted at the basic, higher or additional rate.
M – When the employee’s spouse or civil partner has transferred some of their Personal Allowance. The tax-free allowance will then become higher and Income Tax is deducted at the basic, higher or additional rate.
N – When the employee has transferred some of their Personal Allowance to their spouse or civil partner. The tax-free allowance will then become lower and Income Tax is deducted at the basic, higher or additional rate.
Scottish and Welsh taxpayers
Tax payers in Scotland and Wales receive different tax codes, preceded by the letters S (Scotland) or C (Wales).
When could there be changes to an employee’s tax code?
In situations where an employee’s changed circumstances affect their Income Tax liability, HMRC will issue new tax codes. This could include:
- A new employee joins without you receiving their P45 notice.
- An employee has notified HMRC of an additional source of income.
- An employee’s income has increased into a higher tax band.
- An employee’s state benefits or pensions change.
- An employee has new taxable company benefits.
The tax code changes should be applied to the next pay period. They are usually issued by email.
What happens if Income Tax is underpaid or overpaid?
You will be notified by HMRC or the employee if Income Tax has been overpaid or underpaid for a previous tax year. You will then be issued a revised code, considering increases or decreases of the employee’s tax-free allowance.
Let us know if you want to learn more about your own tax code or the tax codes of your employees. It’s important that you stay updated to ensure the right amount of money is being distributed!
