Over the last few weeks you have probably received your PAYE Coding Notice. This tells you what your tax code will be for the new tax year and how this has been worked out.
For most people, their tax code will change in 2013/2014. But, why does your tax code change? How is it worked out? And what do you have to do about it? Keep reading to find out.
Why do I need a new tax code?
Most people’s tax code changes every year. This is normally because the amount of money you are allowed to earn before you start paying tax – your ‘allowances’ – change on an annual basis.
For example, the basic Personal Allowance in the 2013/14 tax year is rising from £8,205 to £9,440 as part of the government’s commitment to help low income families.
Your new tax code will ensure that you pay the right amount if tax on your income. It also makes sure that your tax payments are spread out over the course of the tax year.
Each time your tax code changes, HMRC send this code to your employer or pension provider. This ensures that the right amount of tax is taken off.
How is this tax code worked out?
1. Work out your allowances
Most people are entitled to the basic Personal Allowance. In the 2013-14 tax year, this is £9,440. It means you can earn £9,440 in the tax year before you start to pay any tax.
If you were born before 6 April 1948 or you are registered blind, you may be entitled to additional allowances.
2. Work out your deductions
Your deductions are any income which you have not paid tax on. This may include company perks, untaxed savings interest or earnings from a second job.
3. Take one from the other
To work out your tax code you take away your deductions from your allowances. So, if you were entitled to the basic Personal Allowance and had no deductions, you would be able to earn £9,440 in the 2013/14 tax year (£9,440 minus £0) before you had to pay any tax.
4. Divide by 10 and add the appropriate letter
Once you have worked out the amount you can earn before you start paying tax, you divide this number by 10. In this case, this would be 944. You then add the appropriate tax code letter for your circumstances.
If you are entitled to the basic Personal Allowance, the letter is ‘L’. So, in this case, your tax code would be 944L.
If you are over a certain age, have more than one job or earn a high amount, your tax code may include a different letter.
What do I have to do when I receive my tax code?
Nothing, unless you think that your tax code is wrong. If this is the case, you should contact HMRC. Make sure you have your National Insurance number and income details to hand.