When you dreamed of running your own business, you probably didn’t kick your heels in delight for the day you’d have to deal with tax codes! While a good understanding of them is needed to avoid paying more tax than necessary, they’re really not as complicated as they seem. Let’s look at how to find your tax code, what it actually means and how to make sure you’re paying the right amount.
How to find your tax code.
A study by the IFS revealed that over 40% of UK taxpayers pay a higher tax rate than needed! Let’s make sure you’re not one of them.
Finding out your tax code is the first step to feeling confident you’re not overpaying. The good thing is, HMRC make it really easy to get hold of it.
There are several places you can find it:
- Your P45
- Your payslip (usually found next to your National Insurance Number)
- Your HMRC online personal tax account
- Any tax code notice you’ve received
- HMRC’s app
As a business owner, you’ll probably have been assigned one of two tax codes: 1257L or 0T. Let’s get into each one – and look at what to do if yours is different.
What is tax code 1257L?
1257L is the code assigned when paying your taxes through the PAYE system. It’s the most common tax code for individuals in England.
- This code means you have the standard personal allowance of £12,570 annual tax-free income.
- If a taxpayer has a single job and doesn’t have untaxed income, 1257L will most likely be their assigned tax code.
What is tax code 0T?
0T is the default tax code used by HMRC when you don’t have any personal tax-free allowance remaining, similar to the BR (basic rate) tax code.
- Your total income will be liable to tax payment (so you want to avoid this code if possible).
- Unlike the BR tax code, 0T isn’t a flat rate and is instead based on your income.
- The 0T tax code applies the following rates in England, Northern Ireland and Wales:
- The basic rate is 20% for income below £37,700.
- The higher rate is 40% for income between £37,700 – £150,000.
- The additional rate is 45% for income above £150,000.
If you don’t have the right tax code, you won’t pay the right amount of tax.
There are other reasons you may have been assigned an incorrect tax code: if your employment status or taxable benefits change, or if you have more than one income source.
The HMRC app is a good place to check the correctness of your tax code:
- If you have been assigned the wrong tax code, you can use the HMRC app to change it and apply for any tax rebates.
- If you’ve overpaid tax, you can apply for a rebate of the excess amount in the app.
- If you’ve underpaid tax, you can pay the difference in the app.
If you have in fact overpaid, you’ll be eligible for a tax refund – as long as it’s within HMRC’s deadlines. Which is why it’s important to always look out for any change to your tax code!
If you’ve been assigned the 0T tax code, check it’s correct ASAP.
0T indicates you’ve used up your tax-free personal allowance, so you’re paying more compared to other tax codes.
We commonly see this code assigned to clients who are retired and receive more than one pension. When their state pension is greater than their personal allowance, any private pension received on top will be subject to the 0T tax code.
There are a few other instances where HMRC will assign this code:
- You recently started a new job and can’t provide your last P45.
- You recently started a new job and haven’t completed a P46.
- You haven’t got enough information to provide a starter checklist.
- You have used up your tax-free personal allowance.
If you’ve been assigned the 0T code, it’s worth checking whether you’re overpaying. Your accountant is your first port of call (drop us a line!). We’ll sort out everything for you, from verifying your tax code and speaking to HMRC to applying for a tax rebate.
If your tax code isn’t 1257L or 0T, let’s investigate.
As the owner of a limited company, we would expect you to have one of these two tax codes. If that’s not the case, let us know by dropping us a message in our contact form. We’ll take a look at what’s going on to give you peace of mind you’re paying the right amount.
