In the UK, mostly everyone is eligible for a tax-free personal allowance Tax-free personal allowance means that a certain amount earned by an individual each year is paid without being taxed. For FY2018/19, if an individual’s tax code is 1185L, it means their personal allowance is £11,850. This amount is received by an individual in equal portions all through the year, so that by the year end an individual receives the entire allowance amount. This means that in case an individual receives payment weekly then the allowance is equal to £228 per week and in case an individual receives the amount monthly, he/she must receive £988 per month. Staring 6th April 2018, the new tax code 1185L has been applicable and will be used by employers or for an additional source of income. Unless an individual is in Scotland, any income above the personal allowance is usually taxed as follows:
Also Read: How to understand Tax-codes
Also Read: Do you understand Tax-codes
Let’s understand the above stated rates with an example: Assume an individual’s taxable income is £34,000 and their personal allowance is equivalent to £11,850 then payable tax is as follows:
|Applicable tax rate||20.00%|
The large chunk of people born post 5 April 1948 will get 1185L as their tax code in 2018/19. Here, letter ‘L’ refers to the normal tax-free amount an individual is entitled to get. The below stated table shows a comparison between 2017/2018 and 2018/2019 basic rate limit, tax free personal allowance, and higher rate threshold.
|Particulars||Tax year 2017/2018||Tax year 2018/2019|
|Basic Rate limit||£33,500||£34,500|
|Higher rate threshold||£45,000||£46,350|
What does a tax code mean?
All UK citizens who are either employed, or have income through pay-as-you-earn (PAYE), are provided with a tax code from tax office – Her Majesty’s Revenue and Customs (HMRC). An individual’s tax code is imperative as it provides an employer the information about income tax that should be deducted from an employee’s salary. The tax office places the charge, of checking the tax code, on the employee. An employee must understand what his/her tax code means and should carefully check the income tax code. In case the tax code is found to be incorrect, an employee will miss out on the chance to claim a tax rebate.
Also Read: Wrong Tax Code - How to Claim Back
Part of an individual’s tax code talks about to the Personal Allowance amount that he/she is eligible to earn prior to they start paying tax on the earnings. The ‘Personal Allowance’ component alters each year at the beginning of the new tax year, hence everyone must check and verify their tax code to see the reflected changes. By verifying the details, an employee is sure about the correct amount of tax being charged on his/her income received from the employer.
In order to find out what an individual’s tax code is, HMRC usually send eligible taxpayers a PAYE notification of coding which provides information about the new tax code. The notification is referred to as ‘Form P2’ and taxpayers must constantly check when they receive this information. Form P2 also encompasses other information (like company benefits and flat rate expenses) which can affect the amount of tax UK employees have to pay. It is imperative to cross-check all the details provided on Form P2 and flag-up any mistake to HMRC. If, for some reason, an individual doesn’t receive their P2 notification of coding, they must check with HMRC for the particulars on the basis of which the tax has been computed. Additionally, an individual can also find his/her tax code details in their online personal tax account.
There are numerous places where an individual can find his/her tax-code, including their payslips, form P45 and P60 or either on HMRC’s PAYE coding notification letters. In case an individual is registered for Her Majesty's Revenue and Customs (HMRC’s) Self-Assessment online service then the tax code can also be found online. Additionally, an individual might have multiple tax codes, depending on the number of employers of an individual. In case of an incorrect tax-code an individual can directly directly get in touch with HMRC on 0300-200-3300 and explain the changes so they the tax code can be adjusted.
Understanding a tax code
A tax code comprises of 3 or 4 numbers, followed by an alphabet. The tax code can be found on an individual’s payslip and it reveals the Personal Allowance an individual is entitled for in a given tax year. An individual does not start paying income tax until he/she is earning above the Personal Allowance figure. The equation is as follows:
- Calculating the tax allowances of an individual. Usually, this is an individual’s personal allowance added to any additional allowances, and job expenses.
- Any income on which an individual hasn’t paid tax on is computed (this may include working part-time or state benefits referred to as deductions.
- Deductions are then deducted from the total tax allowances. The figure, usually, is the total income an individual is permitted to earn without being taxed. The calculation for tax-free earnings is: Total deductions -Total allowances = Personal Allowance.
- The arrived figure for Personal Allowance is then multiplied by 10 and this forms the number section of an individual’s tax code. As an example, the tax code 1185L mean that an individual’s Personal Allowance is £11,000.
The letter or alphabet part of a tax code indicates a modification to a code which is specific to an individual’s circumstances. Most common tax-code letters or alphabet and their definitions are as follows: