Guide to HMRC tax codes and how to find out if you're owed £689

Understanding how much money is being taken off your salary by HM Revenue and Customs (HMRC) each month is rarely simple and correcting any mistakes can often be time-consuming and worst of all, dull.

With National Insurance Contributions, pension payments, and student loans subtracted from your pay packet each month, it might not always seem simple to figure out if you are being paid what you should be. However, a little bit of tax code knowledge can make your life much easier.

The Government raked in £5.8bn from tax overpayments in the past financial year, which works out as an average of £689 in overpaid tax per person. Anyone who has paid too much tax can claim it back from HMRC, but first they must find out their current tax code.

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Adam Bennett, a workplace expert from Digital ID, says: "Keeping an eye on your tax code and understanding its implications is essential for managing your finances effectively. Mistakes can happen, but by staying proactive and informed, you can catch errors early, avoid unexpected bills, and ensure you’re not paying more than you should."

Understanding Your Tax Code

A tax code is a combination of letters and numbers that represents the amount of tax-free income you're entitled to in a tax year. For instance, the code "1257L" for the 2023-24 tax year means you have a Personal Allowance of £12,570 before paying tax on the remaining income.

Common tax codes include:

• 1257L: The standard tax code for most taxpayers.

• BR: Indicates that all income is taxed at the basic rate (20%).

• D0: All income is taxed at the higher rate (40%).

• 0T: No tax-free personal allowance applies, often used if your allowance has been used up or if no P45 is available for a new job.

How to Check Your Tax Code

• Review Your Payslip - Your tax code is usually indicated on your payslip. Compare it to the code you were given at the start of the tax year or when you changed jobs.

• Check Your P45/P60 Forms - If you've switched jobs recently, the P45 form should display your correct tax code. Your P60 form will also show the code used during the tax year.

• Use the Government's Online Tool - The UK government provides an online tool through your personal tax account on GOV.UK that shows your current tax code and explains what it means.

• Contact HMRC Directly - If you're unsure whether your tax code is accurate, contact HMRC directly. They can investigate and make adjustments if necessary.

Common Reasons for Incorrect Tax Codes

Having multiple sources of income may lead to tax miscalculations if HMRC doesn't allocate the correct allowances across them. This can include pension or redundancy payments.

Or, commonly, employers might accidentally report incorrect data to HMRC, resulting in inaccurate codes.

You can even get the wrong code from life changes, like getting married, moving house, or changing jobs can affect your tax status. Inform HMRC promptly to avoid these coding errors.

Even workplace benefits can result in tax code changes. If you receive non-cash benefits like a company car, they should be included in your tax code. Failure to account for them can lead to under- or overpayment.

How Errors Affect Employees

If your tax code results in too much tax being deducted, you might receive a smaller paycheck and could struggle financially until you reclaim the excess tax.

A wrong tax code could also mean you're underpaying tax, leading to a surprise bill from HMRC later, possibly with interest and penalties.

Incorrect deductions will reduce your disposable income, impacting your ability to manage expenses or save.

What to Do If Your Tax Code is Wrong

Contact HMRC and provide them with your updated personal or financial information, making sure to have all of your details to hand. You can contact them over the phone, or through the HMRC app, or using their online tax checker.

Equally, if you have underpaid your tax, you should discuss setting up a repayment plan with HMRC as soon as possible, or you could end up owing the taxman even more money once interest has been applied.