If you’re an employee, you’ll probably see a tax code displayed on your payslip every month. You might not really have paid attention to what these letters and numbers mean in the past but with the new 2016/17 tax year due to start on 6 April, you might see this tax code change. This is because Income Tax is worked out differently every tax year so you could end up paying more or less tax.
You might be wondering what this change will mean for your earnings so to help you out, we’re going to take you through all of the different tax codes that are available for 2016/17 and what they actually mean for your income.
Some common tax codes
If you only work one job, and you earn less than £32,001 in a year, your tax code for the 2016/17 tax year should be 1100L. This is the most common tax code and it’s what the majority of employees working one job on a fixed number of hours will be on. It means you’ll get a tax-free Personal Allowance of £11,000 – this is how much you can earn in a year before you have to pay Income Tax. Anything you earn over this threshold will be taxed at 20%.
It used to be the case that older workers would receive a higher tax-free Personal Allowance and a different code (last year, it was 1066L) – however from 2016/17, you’ll now receive the same Personal Allowance regardless of your age.
If you’ve recently changed your job, you might instead see the emergency tax code 1100L M1 or 1100L W1, depending on whether you’re paid monthly or weekly. This means that the amount of Income Tax you pay is being calculated every month or week and it’s not taking into account the tax you might have already paid in the year – meaning you might overpay tax. HMRC will usually switch you over to the correct tax code and refund you any tax you’ve overpaid, though this can sometimes take a few months. If you’ve been at your job for more than three months and your payslips are still showing the emergency tax code, it’s worth getting in touch with HMRC so they can update your code.
For Scottish employees, the standard tax code is S1100L – this will apply if you’re working one job and you’re entitled to the basic tax-free Personal Allowance of £11,000.
If you work a second job, your tax code for this will be BR. This shows that everything you earn from this job will be taxed at 20% – you’ll get no tax-free income. If you earn over £11,000 in a year from your main job, this will be correct as you’ll already have used up your tax-free Personal Allowance. However, if you earn less than £11,000 a year in your main job, you should get in touch with HMRC and ask them to split your tax-free income between your two jobs.
You might be eligible for the Marriage Allowance if you or your partner earns less than £11,000 in the 2016/17 tax year – find out more about how this works here. This will mean your tax code is updated and will end with either M or N, depending on whether you’re claiming the Marriage Allowance or surrendering it.
Other tax codes
In rare circumstances, your tax code might start with the letter K. This shows that you have a negative tax-free Personal Allowance. This might be the case if you’ve underpaid income tax in a previous year or if you’re getting benefits from work that you need to pay tax on, like a company car. If you have a K tax-code, the number in your tax code shows how much extra your income will be taxed. This should never be more than 50% of your gross pay for the month or week and your tax code should be updated when you’ve repaid the income tax you owe.
The NT code means you don’t pay any income tax. This only applies in cases where you’ve been made bankrupt in the last tax year, you work certain job or you live abroad. If you earn between £32,001 and £150,000 and you have a second job, you’ll see the tax code D0 on your payslip. This shows that all income from that job will be taxed at the higher rate of 40%. If you earn over 150,001 and have a second job, your tax code for that job will show as D1, meaning it’s subject to the additional rate of Income Tax at 45%.