If you work in the UK or you have a pension you will automatically have a tax code, which will ensure you get paid. If you run a business, you will need to ensure that every person that works for you has such a code. Business tax codes might seem a little confusing, but this article will help you to understand more about them.
What is a tax code?
A tax code is part of the PAYE (Pay as you earn) system and every employee needs one so that they know how much tax HMRC will take. Employers are the only people who need it. Freelancers or contractors do not need to be given one.
Some payroll software can help work out the relevant tax codes, however, HMRC also has a lot of information about it. You can work out the codes yourself but there is always a chance that you might enter the incorrect information.
What is the 2019/20 tax code?
The 2019/20 tax code is used by most employees who have an average salary. It is:
- 1250L or
- S1250L if they live and work in Scotland
- C1250L if an employee lives in Wales
This code assumes that your employee is entitled to the full basic personal allowance of £12,500. It also assumes that they have no company car.
How do I know if a tax code is correct?
A tax code will be made up of both numbers and letters and might be hard to understand if you’re not aware of how they work. However, you can always speak to an accountant if you are unsure about anything.
Scottish and Welsh tax codes
If your employee lives in either Scotland or Wales, their tax code will usually start with an S or a C. This tells HMRC that the employee needs to pay Welsh or Scottish tax rates. These rates might be different from those in Northern Ireland or England.
Letters at the start of a tax code
In some cases, tax codes start with the letter K. This is a code that tells you the employee is not being taxed elsewhere. It also tells you they are not getting more than their personal allowance. What this usually means is that the individual is paying tax that is owed from another year. However, it could also mean they are receiving company or state benefits.
Numbers within a tax code
The numbers that are found in a tax code shows how much personal allowance they are entitled to. This is minus income that they haven’t paid any tax on. It is also minus any benefits that they get from working with the company.
Letters following a tax code
The tax code numbers must have a letter following them. This is usually the letter L which indicates how much personal allowance they can have.
- M = Their husband/wife has shared their marriage allowance.
- N = They have shared their marriage allowance with their husband or wife.
- T = There are calculations that work out how much personal allowance they can get. This code usually applies to those who earn more than £100,000.
- 0T = They have used up their personal allowance or they do not have any personal allowance. However, they might also have this code as they have not yet been assigned a tax code.
- BR = This code can be applied if they have another job or they receive a pension.
- D1 = They have another job. This code shows all of their income that they get from you is taxed at an intermediate Scottish tax rate.
- SD0 = This applies to those who live in Scotland and they have more than one job. It also applies if they also receive a pension.
- SC2 = This applies to those who live in Scotland and they have more than one job. It also applies if they also receive a pension. It could also apply if they are taxed at the top rate.
- NT = There is no tax paid on their income.
- W1 = Emergency tax code which means they are taxed as if they have had all of their personal allowance. (Divided by 52 weeks).
- M1 = Emergency tax code which means they are taxed as if they have had all of their personal allowance. (Divided by 12 months).
- X = Emergency tax code which means the tax isn’t being calculated across the whole of the year. They are taxed as if they have used their personal allowance up.
- C = This indicates the tax is calculated accumulatively.
What is an emergency tax code?
An emergency tax code is used if you’re unable to get enough information before you pay the employee’s first wage. It is usually the same code that’s applied to your other employees. This means that you assume they are entitled to all of the personal allowance. Your employee might also be given an emergency tax code is they are receiving company benefits, there were self-employed, or they also receive a state pension.
What is a week 1 or month 1 tax code?
You might have to apply one of these tax codes temporarily. These are usually used if the employee changes their job and their income tax payments are not correct for their earnings. However, these codes can also be used if there is a reduction in hours.
Updating your tax code: Why does it change?
If an employee was to earn less or more money in a second job, they might receive a new tax code. However, they might also receive a new code if they have a company car. Finally, such codes can change if they owe HMRC money for taxes that they have unpaid whilst in other employment.