Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
What is a Tax Code?
A tax code is a numerical number, followed by a letter, that is issued by HMRC to your employer so they know how much income tax to deduct from your salary. The most common tax code is 1257L for the tax year 2022-2023. It means that anyone on this code is given the full tax-free personal allowance of £12,570 through their payslip.
There are times when people find themselves on a different tax code, rightly or wrongly, meaning they are not receiving the full personal allowance or even paying extra tax to HMRC.
HMRC will usually notify you about your tax code or any changes by email if you have a .GOV personal tax account set up. You can see any messages by logging in with your User ID. Alternatively, they will write to you explaining changes to your tax code and a calculation of how they reached your new code.
Your employer doesn’t usually pick your tax code, they are told what to use by HMRC with a P6 notification. The only time they may choose an appropriate tax code is if you started your job without a P45 and filled in a starter checklist (previously known as a P46).
Reasons Your Tax Code is Wrong
There are many reasons that may mean your tax code is wrong. Sometimes HMRC has simply made a mistake and asked your employer to change your tax code incorrectly. Or you forgot to contact HMRC to let them know you are no longer eligible for the marriage allowance.
Tax codes can also be wrong if someone starts a new job without a P45 and they find themselves paying emergency tax. Emergency tax codes usually mean that no personal allowance is being given so earnings are being taxed at 20% or 40% without any tax-free pay.
Another reason that someone may find themselves on the wrong tax code is that they were not employed for the full tax year for example because they have taken some time off or have stopped self-employment.
It’s also common for others to be on an incorrect tax code because HMRC believes that they are in receipt of additional benefits in kind or taxable state benefits which may have stopped. HMRC tend to base their decision on which tax code to use on what they know from previous tax years. So if an individual received healthcare or a company car, for example, in the previous tax year HMRC will assume these are continuing into the current tax year.
What Happens If Your Tax Code is Wrong?
Whatever the reason, if your tax code is wrong then chances are you are paying too much or too little tax because you are in the wrong tax band. Therefore it is essential to get onto the right tax code.
After the tax year has ended HMRC checks everyone’s income and the tax they have paid. If they find that you haven’t paid enough tax they will issue a P800 calculation or simple assessment, depending on how much you owe, which is a calculation and demand for the outstanding tax.
If you’ve paid too much tax then they will get in touch to let you know and change your tax code so that you receive a tax rebate.
How To Fix an Incorrect Tax Code
If you are on the wrong tax code, you should speak to your employer to check they have all the correct information they need. Once they have all this, they should be able to amend your tax code on your behalf in your next payslip.
Unfortunately, your employer may not be able to help you in certain circumstances because they can only act on the information sent to them in the HMRC coding notice. In these cases, you should contact HMRC at 0300 200 3300. Alternatively, you can use the HMRC online checker, by logging into your personal tax account.