Do you know your tax code?

Receiving communication from the HMRC can be scary sometimes, but don’t put off dealing with it. HMRC often need to communicate vital information with you and it’s important that we take the time to read the letter or email and take any action required. Receiving your tax code is no exception. 

Your tax code determines how much income tax you need to pay, whether you’re a business owner or a PAYE employee. Checking the code is correct isn’t complicated, if you know what you’re looking for. Let us explain.

HMRC only knows what it knows

One of the most important things to remember is that HMRC can only calculate your tax code based on the information it has. They don’t automatically know if or when your circumstances change therefore the information they hold on you might not always be up to date.

For example, you might have recently changed jobs or started receiving an additional source of income. Maybe you have started receiving a taxable benefit from your employer or had another change in your circumstances that affects the amount of tax you should be paying.

And sometimes the information HMRC is basing your tax code on may simply be wrong. HMRC can base tax coding notices on what has happened in previous years. So that private health benefit you had with an old employer could still be being taxed even if you no longer receive it. The one-off extra pension contribution you made last tax year, HMRC may be assuming you are doing it again this tax year. Just because HMRC have said it, doesn’t mean it is correct.

How to check your tax code

When your tax code arrives, take a few minutes to check the details behind it.

Does it reflect your current job? Are you receiving any taxable benefits? Have you recently changed employers? Do you have another source of income that HMRC needs to know about?

If something has changed and HMRC hasn’t been told either by yourself or your employer then your tax code might not reflect your current circumstances. It’s also worth getting in touch with HMRC if you receive a new tax code unexpectedly to check the information they hold. 

You can check if your code is right through your online HMRC Personal Tax Account. Here you’ll be able to see your Personal Allowance, estimated income and employment or pension information. Depending on what it is, you can often update information here if something is wrong or missing. 

You can also check your latest payslip which should have your tax code along with your gross pay and deductions on it. You can then use the HMRC’s online service to see what your particular code means. 

Remember that HMRC doesn’t know what it doesn’t know and can only calculate your tax code by using the information it holds at the time. If you’re not sure what your tax code means or something doesn’t look right, don’t ignore it. Speak to an accountant who should be able to help explain or HMRC. 

What you need to inform the HMRC

There are several factors that will change your tax code and you need to let the HMRC of any changes. Things like having multiple jobs and more than one source of income. If you are receiving benefits from your employer such as a company car or private medical insurance these can also affect your tax code, as can a pension. 

HMRC has access to a lot of information about individuals, but it won’t know everything. Getting your tax code wrong can mean paying too much or too little tax. While that might seem like a good thing, it can mean an unexpected tax bill later down the line. To avoid this it’s always better to identify potential issues early on. It can also get messy when your tax code is consistently changing and the more changes that happen the harder it can become to make sure you have paid the correct tax.

Taking five minutes to check your tax code when it arrives can save a much bigger headache further down the line. If you’re unsure what you should be looking for, speak to us and we’ll be happy to help.