At the beginning of a new financial year, we find ourselves trying to start off on the right foot and ensure our tax affairs are in order. We do this to avoid any nasty surprises at year end or, when HMRC reconcile our PAYE records. One thing we need to ensure is correct is our Pay As You Earn (PAYE) tax code.
TAX CODES EXPLAINED- WHAT YOUR TAX CODE MEANS
In short, a tax code is a series of letters and numbers that tell HMRC the amount of tax you should be paying each year, something that is not as scary as it may first seem. Most individuals who pay tax in the UK are entitled to a tax-free personal allowance. For the 2023/24 Tax Year this is £12,570 per annum. Therefore, the most common tax code would be ‘1257L’ indicating your entitlement to a full personal allowance. However, there may be some items included in your tax code that reduce the amount of tax-free income you are entitled to for the year. Some examples of these are:
- The receipt of a state pension.
- Benefits in Kind provided by your employer such as a company car or private medical insurance that have not been taxed through the payroll.
- The receipt of income that cannot be taxed prior to you receiving it, for example savings interest on which tax is due.
Alongside the numbers in your tax code, letters are used to set out additional information to The Revenue or your employer in relation to your tax-free entitlement for the year.
