The tax code on an individual’s pay-slip reflects the amount of Income tax which is payable each month. An individual is on an emergency tax code if the pay-slip reflects either one of the following codes:
- 1150L W1
- 1150L M1
- 1150L X
These Emergency tax codes are temporary and an individual pays tax on all income above the basic Personal Allowance (for tax year 2017/2018 the allowance is £11,500). If the tax code is 1150L it is not considered an emergency tax code. In certain cases, tax code 0T can also be used as a temporary code and it means that an individual will not get Personal Allowance he /she is entitled to until the tax code is updated. An individual can be put on an emergency tax code if he / she started a new job or started to work for an employer after being self-employed.
Tax code ending with ‘W1’ or ‘M1’
W1 (implies week 1) and M1 (implies month 1) are emergency tax codes. This means that the tax to be paid is based only on what an individual is being paid in the present pay period, and not the entire year. Codes ending with W1 or M1 are referred to as ‘non-cumulative’ and appear as ‘515L W1’ or ‘515L M1’. These tax codes are usually updated automatically following the new employer P45 provided by an individual. However, a new tax year, at all times, begins with a normal tax code, and not with an emergency code.
For the tax year 2017/2018, most people born after 5 April 1948 will have a tax code of 1150L. This tax code is based on Personal Allowance of £11,500, divided by 10. The letter in the tax code provides information to the employer so that they can compute taxes payable. Tax codes are issued by HM Revenue and Customs (HMRC) each year and provide information on an individual’s personal tax-free allowance. A tax code is used by employers or pension provider to compute the amount of tax that will be reduced from an employee’s pay or pension.
Letter ‘L’ and its explanation
In the UK, each individual is permitted to earn a certain amount without paying any income tax and is referred to as ‘personal allowance’. The Personal Allowance for tax year 2017/18 is 1150L. If the tax code ends with a letter ‘L’, it means that an individual is eligible for the basic Personal Allowance in that specific tax year. Additionally, if the tax code ends with ‘M’ or ‘N’ it means that an individual has either received or transferred 10% of the Personal Allowance from/to their partner. For example, a person with a 1150L tax code earning £20,000 will not pay tax for the initial £11,500. The earnings over the Personal Allowance, i.e. £8,500 will be eligible for basic rate tax deducted by their employer.
Tax code letters and the code explained
Letters which are part of a tax code reflect an individual’s situation and make available details on how it affects the Personal Allowance
|L||A person is entitled to the standard tax-free Personal Allowance|
|P||A person is born between 6 April 1938 - 5 April 1948 and has a larger tax-free Personal Allowance|
|Y||A person was born before 6 April 1938 and has a larger tax-free Personal Allowance|
|M||Marriage Allowance: A person is eligible to get a transfer of 10% from their partner’s Personal Allowance|
|N||Marriage Allowance: A person is eligible to transfer 10% Personal Allowance to their partner|
|S||A person’s income or pension is taxed according to the Scottish rate of Income Tax|
|T||Tax code includes additional calculations to compute the Personal Allowance, for example it has been abridged as the projected annual income is in excess of £100,000|
|0T||Applicable Personal Allowance has been used up / an individual has started a new job and does not have form P45 / appropriate details were not provided to the new employer (the details they need to assign a tax code)|
|BR||Entire income of a person is taxed at the basic rate|
|D0||Entire income of a person is taxed at a higher rate|
|D1||Entire income of a person is taxed at an additional rate|
|NT||No tax is being paid on this income|
Tax code with letter ‘K’ as a prefix
A tax code with letter ‘K’ at the commencement means an individual’s income has not been taxed in any different way and it’s worth more than the tax-free allowance. This usually happens if any individual:
- Is paying tax from a previous year through their wages or pension
- Is getting state benefits (state pensions) on which tax is payable
- Is getting benefits (like a company car or health insurance) from work that an individual must pay tax on
Working out the tax code
To compute a tax code, firstly, an employed person must add up all the tax allowances. For most people, this will be the basic Personal Allowance; while some might have age specific allowances. At the second step, an individual needs to add up the income on which tax hasn’t been paid – comprising of untaxed: savings interest, company benefits or income from a second job. These deductions are then subtracted from the allowances. The remaining amount is the earnings for a tax year on which income tax is payable. This number should be divided by ‘10’ and add the letter which best fits an individual’s personal circumstances. For example: steps would be:
- Allowances – Basic personal allowance of £11,500
- Deductions – NIL
- Personal allowance for 201718 = £11,500 divided by 10 i.e. 1,150
- If an individual was born after 5 April 1938 and qualifies for full Personal Allowance = letter L
- Therefore, Tax code = 1150L
At the end of each tax year, an employer will issue form P60s to all its employees that will provide a comprehensive detail of their entire income from that specific job and the tax paid. The same information is shared with HMRC from each employer. This information is used to arrive that the right amount of tax has been paid and in case there have been overpayments, HMRC will issue a refund.
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