Making sure that you are on the correct tax code is vital or you may pay the wrong amount of tax. The wrong tax code means that you may pay too little and face a tax bill at the end of the year. Or, it could mean that you could end up paying too much tax.
Our guide tells you everything you need to know about the tax codes for 2015-16.
How you work out your tax code
There are two steps to working out your tax code:
- Step 1 – Total up your tax allowances and reliefs. This may include your Personal Allowance (£10,600 in tax year 2015/16) and any married couples or blind person’s allowance
- Step 2 – Take away your deductions. This will include any income tax you owe from a previous tax year, any pensions/benefits you receive without tax having been deducted and any taxable income that you warn ‘gross’
The amount that remains is the amount of tax-free income you can earn in the 2015-16 tax year.
Your tax code is worked out by dividing the amount of tax-free income that you can earn by 10 and adding a letter appropriate to your circumstances. For example, if you are entitled to the full Personal Allowance in 2015/16 and you have no deductions your tax code will be 1060L.
The 1060L tax code
In the 2015/16 tax year one of the most common tax codes is 1060L.
This will be your tax code if you were born after 5 April 1938, you receive the full Personal Allowance and you have no other allowances or deductions. This means that you can earn £10,600 in the tax year 2015-16 without paying any tax.
It is worked out by dividing the amount of tax-free income that you can earn (£10,600) by ten and adding the letter ‘L’, meaning you are eligible for the full Personal Allowance.
You may also have the 1060L tax code if you are on an emergency tax code
Occasionally, you may be put on an emergency tax code. This often happens when:
- You start a new job and your employer does not have your P45
- Your tax code has changed during the tax year
- You have started a new job having previously been self-employed
Each year the emergency tax code is set and in tax year 2015-16 it is 1060L.
It is important that you or your employer provides all the necessary information to HMRC if you are on an emergency tax code. If you don’t you could end up paying the wrong amount of tax.
You should remember that if your tax code in 2015-16 is 1060L it does not automatically mean that you are on an emergency tax code. Many millions of people will also be on the 1060L code for the right reasons.