Tax codes are issued by HMRC (Her Majesty's Revenue and Customs) to ensure that the right amount of tax is paid. In most cases, HMRC will automatically update your tax code when your income changes, such as when you start a new job, receive a pension, or receive other income. However, if you believe your tax code is incorrect, it is important to contact HMRC to get a revised tax code. This can be done by phone (0300 200 3300) or online.
Taxfiler is a useful tool that allows accountants to simplify the filing process and easily file an online tax return directly to HMRC and Companies House. It is essential to keep HMRC informed of any changes that may affect your tax situation, as this will ensure that your tax code is adjusted accordingly. Otherwise, you may end up paying too much or too little in taxes - which can amount to hundreds of pounds. If your code number includes a “reduction to collect unpaid taxes” item, your coding notice will show the actual amount of unpaid taxes. This is a way for HMRC to collect your income tax and National Insurance from your salary as you go, rather than submitting an annual tax return and settling your own taxes directly with HMRC. HMRC must send you a notice with the code PAYE each year, unless HMRC considers that a PAYE source of income is not taxable, or if you are not required to tax any income from the PAYE source.
Remember that if you are a Scottish taxpayer, your tax code will start with the letter “S”; if you are a Welsh taxpayer, your tax code will start with the letter “C”. HMRC “increases” that figure, multiplying by 100 and dividing by 20 (if you pay taxes at the base rate), and reduces your tax-free amount depending on the result, so you pay additional taxes on the gross figure. Instead of issuing new tax codes to millions of people, HMRC asks employers to simply increase by a certain amount all codes that end, for example, in letter L.You may also be entitled to other allowances, such as the allowance for blind people, or you may have the right to apply for a tax relief for work expenses, such as using your own car for business or professional subscriptions. A cumulative tax code can mean that your employer sometimes pays you a tax refund through the payroll.
Instead of receiving one lump sum at the end of the year, you will receive some benefit from the personal allowance in each pay period - reducing the likelihood of being overpaid or underpaid at the end of the tax year. To illustrate how this works in practice, let's look at an example. Every monthly payment of £200 Jake receives on coffee is taxed at the basic rate of 20%, so after paying £40 in taxes he gets £160 in his hand. To calculate what your own tax should be based on your tax code, take a look at Tim's, Heather's and Jay's examples. This is one of the reasons why it is important to understand how PAYE works: it helps you detect errors and avoid underpaying or overpaying taxes.