HMRC code is 'dangerous' and means you'll pay 60 per cent tax on salary

Dngerous letters to watch for on your HMRC tax code have been revealed. Your tax code is issued by HMRC and tells your employer or pension provider how much tax to take from your wages or pension but it is so important.

Failure to check your tax code is accurate could result in paying up to 60 per cent tax on your salary, Sarah Hollowell, Head of Tax and Trustee Services at Killik and Co, has said.

Code 'L', for instance, means you are entitled to the standard personal allowance and is the most common code. If you have more than one source of PAYE income, you might see the codes BR meaning the whole amount will be taxed at the basic rate, or D0 which is similar but collects tax at the higher rate.

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If you are due to receive a bonus or other one-off payment, it's important that you consider how this might affect your tax code. Under the existing code system, an employee's annual salary is calculated based on the information provided each month.

This means that if a worker receives a bonus, leading to an unusually high monthly income, HMRC's systems may interpret this as 1/12th of their yearly salary and could potentially issue a new tax code under the assumption of increased pay.

The effect of this largely depends on the individual's initial salary and the size of their bonus. In essence, if your total monthly earnings suggest an annual income of £100,000 or more, you might find yourself paying an effective tax rate of 60% on your income.

This is due to the 'personal allowance taper' which comes into play once an individual earns over £100,000. For every £2 earned above this threshold, the personal allowance is reduced by £1, meaning that once you earn £125,140 or more, your allowance is completely eliminated.