Understanding your Tax Code
One of the main reasons why 1 out of 3 UK taxpayers pay too much tax every year, is that they are on the wrong tax code. You can find your current tax code on any recent payslip and it is used by your employer to calculate exactly how much tax to take from your pay or pension. HMRC will tell them which code to use, and it typically starts with a number and ends with a letter.
For the 2021/22 tax year, the basic personal allowance is £12,570. This means that during 2021/22, a taxpayer will need to earn above £12,570 before they pay any income tax. For most people, their tax code in 2021/22 will be 1257L– this is the Personal Allowance they are entitled to divided by 10.
1. What Is a Tax Code?
A UK tax code is used by your employer or pension provider to work out how much Income Tax to take from your pay or pension. HM Revenue and Customs (HMRC) will tell them which code to use.
2. Why is understanding my UK Tax Code important?
Anyone who is employed, or has income through PAYE, is given a tax code by the tax office (HMRC). Your tax code is important because it tells your employer how much income tax should be taken from your salary.
All employed people should understand and check their income PAYE tax code regularly. HMRC expects you to do this. If you don’t check your tax code, you could face an unexpected tax bill, be paying too much tax now, or miss out on refunds from earlier years.
3. How Much Can I Earn before paying any tax in the UK?
The standard Personal Allowance for the 2021/22 tax year is £12,570, which is the amount of income you can earn before paying any tax.
Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000.
4. How Much Can I Earn before paying any tax in Wales?
The Welsh government has decided to keep the income tax rates for Wales the same as England and Northern Ireland for the 2021-22 tax year.
Your Personal Allowance amount is £12,570. So Welsh taxpayers can earn up to £12,570 before they have to pay any income tax at all.
5. How Much Can I Earn before paying any tax in Scotland?
Scotland also has the same Personal Allowance as the rest of the UK (£12,570) for the 2021/22 tax year.
6. When does my new UK tax code start each tax year?
Your new tax code applies from the start of each tax year on 6th April and runs until the following 5th April. So the 2021 tax code started on 6th April 2021 and runs until 5th April 2022.
7. When Do I Need To File Taxes Each Year So That I Don’t Miss The Deadline?
Your Tax Return must normally be filed (completed and submitted to HM Revenue and Customs) by 31 October following the tax year-end (5 April) if you file on paper, or by 31 January following the tax year-end if you file online. So the 2021 Tax Return (for the tax year 2020-2021) is due by 31st October 2021, if filed by paper, or by 31st January 2022, if filed online. You will be sent your Tax Return – or a notice to file online – about May after the end of the tax year.
If you register for self-assessment late (within three months of the filing deadline or later), the deadline is extended to three months from the date of issue of the return. The revised due date will be shown on the Tax Return/notice to file that you are sent.
8. What Are The Different Types Of Tax Allowance I Can Claim In The UK?
Tax-free allowances reduce the amount of tax you have to pay on the income you receive. There are two types:
Allowances – which mean you can earn a certain amount of money before paying tax Tax relief – something you can claim to reduce your overall tax bill
If you’re married or in a civil partnership, you may be entitled to tax benefits. How much you can get depends on when you and your partner were born, and how much you earn.
You can find out more in our blog Marriage Tax Allowance – complete guide – including what it is, how it works, and who can benefit.
Personal savings allowance
You’re allowed to generate a certain amount of income from the interest on your savings each year.
- Basic-rate taxpayers can earn up to £1,000 in savings interest for 2021-22
- Higher-rate taxpayers can earn up to £500 in savings interest for 2021-22
- Additional rate taxpayers will not have a personal savings allowance.
Find out more about tax on your savings and how the personal savings allowance works in our blog
The first £2,000 you receive in dividends from investments is also tax-free (known as your dividend allowance).
Blind person’s allowance
If you, or your spouse or registered civil partner, are blind or have severely impaired sight, your personal tax allowance is increased. If you are both eligible, you’ll each get the allowance.
In 2021-22, the additional allowance is £2,520 – bringing your total personal tax allowance to £15,090.
This is up from an additional allowance of £2,500 in 2020-21.
If you earn less than this threshold, you can transfer any unused blind person’s allowance to your spouse or civil partner – this works in the same way as the marriage allowance.
You can claim tax relief for spousal or child maintenance payments if the following applies:
you or your partner were born before 6 April 1935
you’re paying maintenance under a court order after the relationship ended
the payments are for the maintenance of your ex-spouse or former civil partner (provided they aren’t now remarried or in a new civil partnership) or for your children who are under 21. Maintenance payments relief works in a similar way to the married couple’s allowance. The amount of maintenance you get is worth 10% of the maintenance you pay to your ex-partner, up to a maximum of £326 (10% of £3,260).
What do the letters mean?
Letters in your tax code refer to your situation and how it affects your Personal Allowance.
|Letters||What they mean|
|L||You’re entitled to the standard tax-free Personal Allowance|
|M||Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal Allowance|
|N||Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner|
|T||Your tax code includes other calculations to work out your Personal Allowance|
|0T||Your Personal Allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code|
|BR||All your income from this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension)|
|D0||All your income from this job or pension is taxed at the higher rate (usually used if you’ve got more than one job or pension)|
|D1||All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension)|
|NT||You’re not paying any tax on this income|
|S||Your income or pension is taxed using the rates in Scotland|
|S0T||Your Personal Allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code|
|SBR||All your income from this job or pension is taxed at the basic rate in Scotland (usually used if you’ve got more than one job or pension)|
|SD0||All your income from this job or pension is taxed at the intermediate rate in Scotland (usually used if you’ve got more than one job or pension)|
|SD1||All your income from this job or pension is taxed at the higher rate in Scotland (usually used if you’ve got more than one job or pension)|
|SD2||All your income from this job or pension is taxed at the top rate in Scotland(usually used if you’ve got more than one job or pension)|
|C||Your income or pension is taxed using the rates in Wales|
|C0T||Your Personal Allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code|
|CBR||All your income from this job or pension is taxed at the basic rate in Wales (usually used if you’ve got more than one job or pension)|
|CD0||All your income from this job or pension is taxed at the higher rate in Wales (usually used if you’ve got more than one job or pension)|
|CD1||All your income from this job or pension is taxed at the additional rate in Wales (usually used if you’ve got more than one job or pension)|
What if your tax code has a ‘K’ at the beginning?
Tax codes with ‘K’ at the beginning mean you have income that is not being taxed another way and it’s worth more than your tax-free allowance.
For most people, this happens when you’re:
- paying tax you owe from a previous year through your wages or pension
- getting benefits you need to pay tax on – these can be state benefits or company benefits
- Your employer or pension provider takes the tax due on the income that has not been taxed from your wages or pension – even if another organization is paying the untaxed income to you.
Employers and pension providers cannot take more than half your pre-tax wages or pension when using a K tax code.
What If your tax code has ‘W1’ or ‘M1’ at the end?
These are emergency tax codes.
Reasons you may be on an emergency tax code:
- If you start a new job
- If you’re working for an employer after being self-employed
- If you’re getting company benefits or the State Pension
Once they have the correct details for you, your employer can update your tax code. HMRC will correct it automatically after you give the employer details of your previous income or pension.
It is wise for people to check they are on the correct tax code, as the difference over the course of a financial year can be substantial.
What Can I Do If My Tax Code Is Wrong?
If you think your tax code is wrong, you should contact HMRC. You can do this on the Income Tax Helpline 0300 200 3300 (or via the HMRC contact us page).
What is the Basic Tax Code for 2021-2022?
The standard tax code for the 2021 – 2022 year is 1257L, which means you can earn £12,570 as a tax-free personal allowance until midnight on the 5th of April 2022.
Will Taxes Go Up In the Coming Year?
Income tax rates and bands will not change until the next tax year which starts on the 6th April 2020