Understanding Tax Codes: Are you Paying More Than you Should?

Thousands of people across the England, Wales, Scotland and Northern Ireland are paying more tax than they need to—could you be one of them? Understanding your tax code is crucial in ensuring you aren’t overpaying.

According to research, almost a third of UK adults who have checked their tax code (31%) have found that they have been on the wrong one at some point. Additionally, one in six (15%) UK adults do not know if they are on the right tax code and 6% of UK adults have realised they were on the incorrect tax code within the last year.

You can find your tax code printed on your payslip, P60, or annual notification letter from HMRC. Common reasons for having the wrong tax code include job changes, adjustments in state benefits, or changes in company benefits.

A tax code may seem like an accidental assortment of letters and numbers, but it holds the key to how much tax you pay. If you’re allocated the wrong tax code, you could end up paying hundreds or even thousands of pounds extra.

In this article, I’ll cover what you need to know about tax codes, how to check if yours is correct, and the steps to take if it’s not. Let’s dive in to ensure you’re not giving the tax man more than necessary.

Are You Overpaying HMRC?

Three-quarters (75%) of those who found they were on the wrong tax code have overpaid HMRC by an average of £689, amounting to a staggering £5.8 billion as a nation. Nearly one in five UK adults (18%) have never checked their tax code, and those who do typically only check once every 16 months.

Why Might My Tax Code Be Wrong?

There are several situations which could result in you being assigned the wrong tax code. Common reasons include:

• You changed your job: If you have recently changed jobs or are still waiting for a P45 from your previous employer, you could have been given the wrong tax code. The tax office might be unaware that you have finished your previous job, so they may consider your new one a second source of income and tax you accordingly. You may also be put on an emergency tax code until an accurate tax code is assigned.
• Your state benefits change: State benefits are not taxed, but they often take up part of your Personal Allowance, which can impact your tax code. If the benefits you receive change, so could your tax-free earnings entitlement used to determine your tax code.
• Your company benefits change: Certain benefits you get from your employer, such as a company car, gym membership, or health insurance, are considered taxable. If you start receiving or have a change in any of these benefits, it may affect your tax code.

If any of these circumstances apply, you should check your tax code as soon as possible. However, even if they do not, it still makes financial sense to confirm your tax code is correct.

Is it Just me or is There Widespread Confusion About Tax Codes?

Britons most commonly check their tax code for no specific reason (19%) or out of habit (17%). Others check due to a job change (12%) or because they have previously been on the wrong tax code (8%). Among all UK adults, less than half (42%) are confident that their current tax code is correct.

Moreover, almost four in ten (39%) do not understand their tax code, putting them at a disadvantage from the start. Over two-thirds (69%) admit they do not know the rules around claiming back overpaid tax. Less than one-fifth have employed professional services to manage their personal taxes (18%), down from three in ten in 2023’s study (29%).

How to Can I Check If My Tax Code is Correct?

Your tax code is composed of a series of numbers and letters, which HMRC uses to determine how much Income Tax you owe. For example, 1257L is commonly used when you have a single source of income through a job or pension and allows you to earn £12,570 a year (your Personal Allowance for 2024/25) before paying Income Tax.

Most tax codes consist of letters and numbers:

• The numbers indicate your tax-free allowance for the year.
• The letters relate to your specific tax type and what type of work you are doing.

Here are some of the most common tax codes and what they mean:

L: The most common tax code for people who are working and entitled to the basic tax-free Personal Allowance.

M: Used for an employee whose spouse or civil partner has transferred some of their Personal Allowance.

N: Used for an employee who has transferred some of their Personal Allowance to their spouse or civil partner.

T: Used when HMRC needs to review some items with the employee.

K: This code indicates that the tax-free benefits you receive are greater than your annual Personal Allowance. As a result, you will pay the extra tax due from your benefits through your income.

0T: Used when an employee hasn’t given you a P45 or enough details to work out their tax code, or when their Personal Allowance has been used up.

There are even different tax codes that apply in Scotland, England, Northern Ireland, and Wales. If you’re on the wrong code, you might need to update your employment details or whether you’ve had a recent change in income.

If you think your tax code is wrong, you need to contact HMRC directly. Your employer (if relevant) won’t be able to do this for you. You can check if HMRC has your correct, up-to-date information online. https://www.gov.uk/check-income-tax-current-year

How should I go about reclaiming my overpaid tax or pay the HMRC?

If you find you have been on the wrong tax code, you may be owed a rebate, or you may owe money to HMRC. HMRC may already know this, so you should be sent a tax calculation letter (a P800 form) or a Simple Assessment letter by the end of the tax year (5 April). These letters will tell you how to pay HMRC or reclaim overpaid tax.

Are there any time limits on when I can pay?

Remember, there are time limits to reclaim overpaid Income Tax, which is four years from the end of the tax year in which you are trying to claim. If you are in doubt, the earlier you contact HMRC, the better.

How can I stay informed and take action to protect my wealth?

Understanding and managing your tax code is essential. Ensure that all your details are current, and promptly inform HMRC of any changes in your circumstances. This will avoid discrepancies and potential financial strain.

If you need professional expert guidance on planning for your future, please do not hesitate to contact us. We’re dedicated to helping you navigate every aspect of your financial journey. Whether you want to create a comprehensive retirement plan, invest wisely or manage your wealth, we offer personalised strategies tailored to your unique needs and goals.