The new tax year starts from 6th April 2015 and will run to 5th April 2016. This means that you are likely to see the tax code that appears on your payslip change, as income tax is worked out differently with every tax year. If you’ve got a different tax code for the 2015/16 tax year, or you start a new job at some point in 2015, you might be confused as to what this means for you and your income. Don’t worry – our helpful guide will explain the different tax codes you’re likely to see and how they actually relate to your income.
Tax codes are changing for the new tax year - find out what yours means in our blog on tax codes for 2016/17.
If you have one job, were born after 5th April 1948, and earn less than £31,785 a year, your tax code for the year 2015/16 will most likely be 1060L. This means that you’re entitled to the tax-free Personal Allowance at £10,600 – the amount you can earn before you have to pay Income Tax. It’s the most common tax code for basic rate taxpayers, meaning your income is taxed at 20%.
However, don’t confuse this with the emergency tax code 1060L M1 or 1060L W1, depending on whether you’re paid monthly or weekly. It means that the amount of tax you pay on your earnings is currently being calculated based on how much you’ve earned that month or week, and isn’t taking into account any tax you’ve already paid in the year. This could mean that you may end up paying too much tax. If you’ve just started a new job, don’t worry about this, as it can sometimes take a couple of months for you to get switched over to the correct code from emergency tax. However, if this tax code is still showing on your payslip after you’ve been at your job for three months or more, contact HMRC to get them to update it.
If you work a second job, the tax code on the payslip for this will be BR. This means that all income for this job will be taxed at the basic rate of 20%, with no Personal Allowance. This is usually correct if you’ve earned more than £10,600 in the year for your main job. However, if you earn less than this amount on your main job, you should contact HMRC at the end of the year and get a refund, or ask them to split your tax-free allowance between your two jobs.
Some other tax codes
You might see the letter P in your tax code if you’re paying basic rate tax, but were born between 6th April 1938 and 5th April 1948, or the letter Y if you were born before 6th April 1938. This means that you’re entitled to a bigger Personal Allowance, which is calculated based on your earnings. The number in your tax code is related to your Personal Allowance, so if it says 1066, your Personal Allowance for the year will be £10,660. Your tax code may also start with the letter K, meaning that you get a negative tax-free amount. This usually happens if you’ve underpaid tax in a previous year; you’re receiving benefits that you need to pay tax on; or if you’re getting benefits from work that you have to pay tax on, such as a company car, but you don’t have enough Personal Allowance to cover this. With K codes, the number in your tax code doesn’t refer to how much tax-free allowance you’re eligible to receive, but how much extra your income will be taxed. The amount deducted by a K code should never be more than 50% of your gross pay for that month or week, and your tax code should be updated when you’ve paid back what you owe.
The NT tax code means that you shouldn’t pay any tax on your income. This is usually only in situations where you’ve been made bankrupt during the last year or if you live abroad. If you’re a higher earner with a second job or pension, you could see the D0 tax code to tell you that all of the income you earn from that job will be taxed at 40%, while the D1 code means it will all be taxed at 45%.