Everyone will have a tax code but not many people will understand what it means or what it is used for. I will attempt to give a short explanation of how tax codes work.
Generally, most individuals in employment will receive a personal allowance. This is the amount of income they can make before they have to start paying tax on it. For the 2022-23 tax year, this amount is £12,570.
A tax code is used to help an employer know how much each individual can earn without paying tax so that they know how much to deduct from your income and give directly to HMRC.
The standard tax code is currently 1257L. The number is your tax free amount divided by 10, and the letter L means you are entitled to the standard tax free personal allowance. HMRC have a guide to what all the different letters are here.
Your tax code may be different to this for a number of reasons. You may perhaps transfer or receive part of your partner’s personal allowance (if so you would have either a N or M at the end of your tax code), or you may receive benefits from your employment (such as a company car, healthcare etc) that would mean your tax code is lower.
If the number within your tax code is different, what that means is that the amount you can earn before paying tax is a different amount. For example, if you transfer part of your allowance to your partner the number will drop to 1131.
Tax codes are used to get a best estimate of how much tax you will need to pay during the year. Obviously things could change from when they are calculated, and HMRC will do a full calculation looking at the year as a whole after each tax year has ended.
If you underpay your tax and have to make it up in a following year (usually through a change in your tax code for that year) or you have overpaid tax and HMRC will issue you with a tax rebate. In both instances you will receive a letter in the post from HMRC – they will never call you about these issues, so any calls you receive are likely to be fraudulent.
You can check your tax code here. This will give you a breakdown of any reasons why it might be different from the standard code.
There are certain allowances for expenses that you incur in the course of employment which might mean that you have a higher number in your tax code. This may have happened for example, for working from home expenses, or for subscription to a professional body which is not refunded by your employer. Unless there is a claim put through in some form (either on a self-assessment tax return or another official HMRC) then when HMRC review your tax calculation at the end of the year it will look like you have underpaid tax so it is important that you claim for anything that you were expecting a tax allowance for.
