With the new Tax year upon us Advo’s Payroll Manager, Caroline Jackson reflects on how the past impacts and drives the current tax rules and updates us on what HMRC Codes really mean.
The start of a new tax year is fast approaching. The 6th of April may seem to be a date based on random choice rather than a specific reason. But the start of our tax year has its origins deeply rooted in the country’s history of calendar reforms, agricultural cycles, and financial practices. From the transition away from the Julian to the Gregorian calendar in the 16th century to the eventual shift in the tax year’s start date in 1800, the 6th of April reflects the UK’s ongoing effort to maintain financial stability while adjusting to changing times.
Even though our tax systems have evolved it looks like this legacy of earlier times is here to stay.
This is also a good time to reflect on what makes up a tax code
In the UK, if you are paid under a PAYE scheme you will be allocated a personal tax code, most tax codes are a combination of numbers and letters.
The number is used to work out how much tax-free pay an employee can earn in each tax year before they start paying tax. Currently, the standard tax-free Personal Allowance is £12,570 which would show as tax code 1257L (the tax allowance is the tax code number x 10). Although there is a standard allowance this can vary due to a person’s personal circumstances.
The letters are providing information to an employer of a specific personal allowance, some examples regularly in use below:
L Entitled to the full personal allowance
M 10% of individual partner’s personal allowance has been transferred across.
N The reverse of the above, individual has transferred the 10%
T The tax code considers other calculations to work out the personal allowance.
NT No tax is being paid
BR Stands for basic rate, all income taxed at 20%
DO All income taxed at 40%
D1 All income taxed at the additional rate of 45%. Applies to income over £125,140
K If you have a tax code pre-fixed with a K, this usually means that HMRC are recovering tax owed.
Another consideration is if there is a W1/M1 of just ‘X’ suffix on a tax code. This means that tax will only be calculated on the payment being processed in the current period, it does not take into account any tax already paid since 6th April.
Still confused, need more: just reach out to your Advo contact.