How to Check Your Tax Code and Avoid Costly HMRC Mistakes
Navigating the intricacies of tax codes can be a daunting task for many employees. Your tax code determines how much income tax is deducted from your salary, and even a minor error could leave you paying more than your fair share—or not enough, leading to unexpected tax bills later on.
Workplace expert Adam Bennett from Digital ID is urging Brits to check their tax code and regularly checking it for errors is crucial to avoid ending up out of pocket.
Understanding Your Tax Code
A tax code is a combination of letters and numbers that represents the amount of tax-free income you’re entitled to in a tax year. For instance, the code “1257L” for the 2023-24 tax year means you have a Personal Allowance of £12,570 before paying tax on the remaining income.
Common tax codes include:
- 1257L: The standard tax code for most taxpayers.
- BR: Indicates that all income is taxed at the basic rate (20%).
- D0: All income is taxed at the higher rate (40%).
- 0T: No tax-free personal allowance applies, often used if your allowance has been used up or if no P45 is available for a new job.
How to Check Your Tax Code
Review Your Payslip: Your tax code is usually indicated on your payslip. Compare it to the code you were given at the start of the tax year or when you changed jobs.
Check Your P45/P60 Forms: If you’ve switched jobs recently, the P45 form should display your correct tax code. Your P60 form will also show the code used during the tax year.
Use the Government’s Online Tool: The UK government provides an online tool through your personal tax account on GOV.UK that shows your current tax code and explains what it means.
Contact HMRC Directly: If you’re unsure whether your tax code is accurate, contact HMRC directly. They can investigate and make adjustments if necessary.
Common Reasons for Incorrect Tax Codes
Multiple Jobs/Pensions: Having multiple sources of income may lead to tax miscalculations if HMRC doesn’t allocate the correct allowances across them.
Employer Mistakes: Employers might accidentally report incorrect data to HMRC, resulting in inaccurate codes.
Life Changes: Getting married, moving house, or changing jobs can affect your tax status. Inform HMRC promptly to avoid coding errors.
Benefits in Kind: If you receive non-cash benefits like a company car, they should be included in your tax code. Failure to account for them can lead to under- or overpayment.
How Errors Affect Employees
Overpayment: If your tax code results in too much tax being deducted, you might receive a smaller paycheck and could struggle financially until you reclaim the excess tax.
Underpayment: A wrong tax code could mean you’re underpaying tax, leading to a surprise bill from HMRC later, possibly with interest and penalties.
Reduced Take-Home Pay: Incorrect deductions reduce your disposable income, impacting your ability to manage expenses or save.
What to Do If Your Tax Code is Wrong
Correct Your Details: Contact HMRC to provide updated personal or financial information.
Claim a Refund: If you’ve paid too much, you can apply for a refund.
Plan for a Repayment Schedule: If you’ve underpaid, discuss a manageable repayment plan with HMRC.
Adam bennett, a workplace expert from Digital ID says: Keeping an eye on your tax code and understanding its implications is essential for managing your finances effectively. Mistakes can happen, but by staying proactive and informed, you can catch errors early, avoid unexpected bills, and ensure you’re not paying more than you should.
SOURCE: https://www.digitalprlab.co.uk/