Tax code ‘trap’ could leave you paying thousands to HMRC | Personal Finance | Finance

Every year, millions of pounds are lost due to tax code errors as many people in the UK are unaware of what their tax code actually means.

Being in the wrong tax code could cost Britons thousands of pounds if left unchecked so it’s important that people understand the implications of their codes and how to avoid costly mistakes.

The most common tax code is 1257L, which means people apply for the standard £12,570 tax-free allowance and have one source of income.

Jonathan Merry, financial expert and CEO of Moneyzine explains that “it’s absolutely essential” that everyone checks their tax code.

If someone’s code is incorrect, they could be overpaying or underpaying taxes without even realising it.

Tax codes are assigned by HM Revenue and Customs (HMRC) based on the information they have about an individual’s income.

It is possible for this information to be inaccurate or out-of-date, resulting in incorrect taxes being taken from wages and pensions.

This can mean a loss of thousands of pounds if left unchecked, he said.

Mr Merry continued: “What many people don’t realise is that you are personably liable for making sure your tax code is correct. Not your workplace, not the Government, you!

“This means that you need to regularly check your tax code – at least once a year – to ensure that you’re paying the correct amount and don’t fall into the trap. There have been cases where people have had to pay back thousands of pounds in tax, an eye-watering sum that would put many in a tight spot.”

Fortunately, there are ways to ensure people are paying the correct amount of tax. By regularly checking one’s payslips and ensuring that their tax code is correct, they can prevent any mistakes from occurring in the first place.

If someone thinks there is something may be wrong with their code, they should contact HMRC as soon as possible so they can update it accordingly.

If people wish to check their current tax situation, they can use HMRC’s online tools such as ‘Check Your Tax Code’ and ‘Check Your State Pension’.

These services are available free of charge and provide easy access to information about what an individual pays in taxes each year.

The most common tax codes (and what they mean)

In the UK, tax code’s can be broken down into two parts: the numeric portion and the letter portion. Here’s a breakdown of each part:

Mr Merry explained the numeric part of the tax code represents someone’s tax-free personal allowance.

In the case of “1257L,” the numeric portion is “1257.” This means that someone has a tax-free personal allowance of £12,570 for the tax year.

The letter portion is the portion of the tax code which provides additional information about one’s tax status and entitlements.

In “1257L,” the letter portion is “L.” The letter “L” signifies that someone is entitled to the standard tax allowances and deductions available for the tax year.

Together, the numeric portion and the letter portion of the tax code determine the specific allowances, deductions, and tax thresholds that apply to their income.

Most common letters that can be featured in the tax codes:

• L – Standard tax code: This is the default tax code assigned to individuals who have no special circumstances affecting their tax obligations. It indicates that individuals are entitled to the standard tax allowances and deductions.
• BR – Basic Rate tax code: This code is used when someone has income from multiple sources or when their total income exceeds the basic rate tax threshold. It means that all their income will be taxed at the basic rate.
• D0 – Higher Rate tax code: If someone has a D0 tax code, it signifies that all their income will be taxed at the higher rate. This usually applies to individuals with multiple sources of income that exceed the higher rate tax threshold.
• D1 – Additional Rate tax code: Individuals assigned a D1 tax code have all their income subject to the additional rate of tax. This applies when their income exceeds the additional rate tax threshold.
• E – Emergency tax code: This temporary code is used when someone’s employer or pension provider doesn’t have all the necessary information about their tax status. It means that people will be taxed at a higher rate until their tax situation is clarified.
• NT – No Tax tax code: The NT tax code indicates that no tax should be deducted from one’s income. This is usually applicable to individuals who have certain types of income that are exempt from tax, such as some state benefits.