Tax code
Encyclopedia
In the UK
, every person paid under the PAYE
scheme is allocated a tax code by HM Revenue and Customs. This is usually in the form of a number followed by a letter suffix, though other 'non-standard' codes are also used. This code describes to employers how much tax to deduct from an employee. The code is normally based on information provided to HMRC by the taxpayer or their employer. Tax codes are usually adjusted once a year to take into account any changes made in the National Budget, but can be altered more often to reflect an employee's circumstances. Tax codes can be changed if someone has paid too much or too little tax the previous tax year, if an employee receives state benefits, or has non-PAYE income (for example, self-employed earnings). Changes in a tax code are to ensure the employee has paid the correct amount of tax by the end of each tax year.
Tax codes are passed between periods of employment by a P45, which is generated when a person leaves a job. If a P45 is mislaid or not supplied at the end of a period of employment, a P46 can be filled out in order to determine which tax code is applicable to a person. Between submitting a P46 and receiving the correct tax code from HM Revenue and Customs, an employer can apply the emergency tax code on a week 1 basis. In this case, tax will be calculated as if the employee is working in the first week of the tax year, and all previous earnings are ignored.
At the end of each tax year employers are required to send out a P60
which documents the total earnings and tax a person has paid within that tax year.
Tax free Personal allowances can only be taken once across earnings. A second job or a job with a pension is taxed at a basic rate of 20%, or the tax allowance can be split across both sources of income.
Non-standard codes are used when usual tax free allowances do not apply. Where no allowances exist, code BR is used to tax at basic rate (20%), and code D0 is used to tax at higher rate (40%). If no tax is to be collected, code NT is used. If tax has to be collected on an income above PAYE earnings, a K code is used. This works as equivalent to a negative tax allowance.
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, every person paid under the PAYE
PAYE
Pay as you earn or PAYE refers to a system of withholding of income tax from payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns. PAYE may also refer to withholding of the...
scheme is allocated a tax code by HM Revenue and Customs. This is usually in the form of a number followed by a letter suffix, though other 'non-standard' codes are also used. This code describes to employers how much tax to deduct from an employee. The code is normally based on information provided to HMRC by the taxpayer or their employer. Tax codes are usually adjusted once a year to take into account any changes made in the National Budget, but can be altered more often to reflect an employee's circumstances. Tax codes can be changed if someone has paid too much or too little tax the previous tax year, if an employee receives state benefits, or has non-PAYE income (for example, self-employed earnings). Changes in a tax code are to ensure the employee has paid the correct amount of tax by the end of each tax year.
Tax codes are passed between periods of employment by a P45, which is generated when a person leaves a job. If a P45 is mislaid or not supplied at the end of a period of employment, a P46 can be filled out in order to determine which tax code is applicable to a person. Between submitting a P46 and receiving the correct tax code from HM Revenue and Customs, an employer can apply the emergency tax code on a week 1 basis. In this case, tax will be calculated as if the employee is working in the first week of the tax year, and all previous earnings are ignored.
At the end of each tax year employers are required to send out a P60
P60
In the UK and the Republic of Ireland, a P60 is a statement issued to taxpayers at the end of a tax year. It is important a taxpayer does not destroy the P60 forms issued to them, as they form a vital part of the proof that tax has been paid.- Ireland :In Ireland, it details a taxpayer's taxable...
which documents the total earnings and tax a person has paid within that tax year.
Tax free Personal allowances
Tax codes followed by the letter L represent the size of tax free personal allowance on earnings. This is the total amount of money, per year, one can earn tax free. The number attached to them represents tax free earnings divided by 10. In the tax year 2010/2011 the standard tax free allowance on income is £6475, which means the standard code, and the emergency tax code is 647L. Persons over 65 and 75 have an increased personal allowance.Tax free Personal allowances can only be taken once across earnings. A second job or a job with a pension is taxed at a basic rate of 20%, or the tax allowance can be split across both sources of income.
Non-standard codes are used when usual tax free allowances do not apply. Where no allowances exist, code BR is used to tax at basic rate (20%), and code D0 is used to tax at higher rate (40%). If no tax is to be collected, code NT is used. If tax has to be collected on an income above PAYE earnings, a K code is used. This works as equivalent to a negative tax allowance.