At Clearways Accountants we are often asked by employed clients to check their PAYE Notice of Coding as they do not understand what it is telling them.
Your PAYE Notice of Coding tells you your tax code.
Your tax code tells you how much tax free income you will receive in the tax year (6th April to 5th April).
How does the tax code get used?
The code is multiplied by 10 and divided by 12. Each month this amount of income is tax free.
For 2013-14 the basic tax code is 944, this is because the tax free personal allowance is £9,440.
So if your code is 944 you will receive £786.67 per month tax free. If you earn £786.67 or less per month you will pay no income tax. If you earn more than this amount you will pay tax at 20% or 40%, depending on your total salary.
What adjustments are made to the tax code?
Your tax code is increased if you are allowed more tax free income, for example, if you make charitable donations, receive a married couple allowance, or pay professional subscriptions.
Your tax code is reduced if you receive benefits in kind, such as a company car or private medical insurance. It will also be reduced if you have substantial other income such as dividends or buy-to-let property income.
For example, if you have a buy-to-let property and the profit you declared on your last tax return was £4,777. This figure will be divided by 10 and deducted from the basic tax code. Your new tax code will be 467 (that is 944 less 477).
What if the items that reduce your tax-free amount are greater than your allowances?
Or if your income is over £150,000 your tax code will be amended to take account of the extra tax due and the fact that you will receive no personal allowance.
What does the letter after the number mean?
L the standard code for people born after 5th April 1948 and eligible for the basic personal allowance.
P the normal code for pensioners born between 6th April 1938 and 5th April 1948.
Y the code for pensioners entitled to extra tax free income because they were born before 6th April 1938
T is the code if HMRC need to review and check items in your tax code.
K is the code used when you receive no tax free allowance at all and further tax is due.
BR is the code, often used on second jobs, and it means that your income will be taxed at basic rate tax only (20%)
OT is used when your allowances have been used up or reduced to nil. Your income will be taxed at the relevant tax rates of 20%, 40% or 45%. It may also be used if you have just started a new job and you have no P45 or you have not completed the P46 before your first pay day.
NT is used when all your income is taxed at the higher rate of tax (currently 40%).
D1 is used when all your income is taxed at the addition rate of tax (currently 45%).
NT is used when no tax is to be taken from your income.
If you need help in completing your income tax return and understanding how the numbers in your tax return link to your PAYE Notice of Coding then contact Clearways Accountants or call us and book your free consultation.