Do you know what your tax code is?
Your tax code generally changes every year and is used by your employer or pension provider to work out the amount of tax that they should deduct from your pay or pension.
The process for working out everyone’s individual tax code is the same and so our guide looks at how you can work out your tax code for 2011 and where you can find it.
Where you will find your tax code
Every year, you should receive a PAYE Coding Notice from HM Revenue and Customs (HMRC). This document outlines your tax allowances and your deductions and explains how your tax code has been worked out.
Your PAYE Coding Notice also tells your employer or pension provider how much tax-free income you can earn in the current tax year.
You are likely to have received your current PAYE Coding Notice in spring 2011.
How your tax code is worked out
There are four steps involved in working out what your tax code for 2011 should be.
Firstly, your tax allowances are added up. Your tax allowances are the amounts you can earn without paying tax such as your main Personal Allowance which, in the tax year 2011/12, is £7,475. In addition, if you are eligible to claim other allowances such as Blind Person’s or Married Couple’s Allowance these will be included in your total tax allowances.
Then, any income that you haven’t already paid tax on is added up. This might include company benefits, savings income or earnings from a second job. These are called your ‘deductions’.
Your deductions are then taken away from your allowances. The amount that is left is the amount of tax-free income you can earn in the current tax year.
In most cases, the amount of tax-free income you can earn is then divided by ten and added to a letter that fits your circumstances.
Let’s say that you’re eligible for the full Personal Allowance (£7,475 in 2011/12) and you have no other allowances. You have £500 of income that you have not paid tax on.
Your total tax allowances would be £7,475. Your total deductions would be £500.
The amount of money you could earn before you paid any tax would therefore be £6,975 (£7,475 minus £500). Your tax code would be 697L.