If you pay your tax through the Pay as you Earn (PAYE) system, over the next few weeks you will receive your PAYE Coding Notice for the 2012/2013 tax year.
Your PAYE Coding Notice tells you what your tax code should be and how it is worked out. It also tells your employer or pension provider how much tax-free income you are entitled to and how much tax they should deduct.
Our guide will help you understand your 2012 – 2013 coding notice. Keep reading to learn more.
Tax allowances/reliefs that increase your tax-free income
There are two main parts to your PAYE Coding Notice.
Firstly, there are tax allowances and reliefs that increase the amount of tax-free income that you are entitled to earn. These include:
- Tax-free allowances such as your Personal Allowance (the basic Personal Allowance for the 2012/13 tax year is £8,105)
- Other allowances and reliefs that you are entitled to, including Married Couple’s Allowance and any professional allowances/subscriptions
If these are the only entries on your PAYE Coding Notice, they are deducted from your taxable income (such as income from employment, pensions and rent) and you pay tax on what’s left.
Items that reduce your tax-free income
Your PAYE Coding Notice may also include negative amounts which reduce the amount of tax-free income that you are entitled to earn. These include:
- Unpaid income tax that you owe from a previous tax year
- Any taxable income that you receive without tax being deducted (for example company benefits such as medical insurance or a company car)
- State benefits or any pensions that you receive without tax having been deducted
Effect of deductions from allowances
One your deductions are taken away from your tax free allowances there are three possible outcomes:
- The items that reduce your tax-free amount are less than your allowances – this means that whatever amount is left is the amount of tax-free pay you are entitled to in the 2012/13 tax year
- The items that reduce your tax-free amount are equal to your allowances – this means you will pay tax on all your taxable income
- The items that reduce your tax-free amount are greater than your allowances – this means you will owe tax on the difference between the two. The amount will be added to your overall taxable income and you will pay tax on the total over the whole tax year
Common tax codes in 2012/13
If you receive the basic Personal Allowance in the 2012/13 tax year and you have no deductions, your tax code is likely to be 810L.
This is worked out by dividing your Personal Allowance (£8,105) by ten and then adding the letter ‘L’.
If your PAYE Coding Notice is wrong
When you receive your PAYE Coding Notice over the next few weeks, if your circumstances have changed or there is incorrect information then you should contact HM Revenue and Customs (HMRC).
If the figures on your Coding Notice are incorrect, you could end up paying the wrong amount of tax.