Having the wrong tax code could be costing you money

You might be paying more in tax than you should be - simply because your tax code is wrong.

According to accountancy firm UHY Hacker Young, more than five million people paid £3.5bn more than they needed to in income tax during 2023-24.

And this was largely because of tax code errors.

That doesn’t mean the tax system is broken.

But it does show how easy it is for mistakes to creep in, and that if your tax code is wrong, you could be paying more tax than you need to.

What are tax codes?

Tax codes are used to calculate the taxable income of people who pay tax through Pay As You Earn (PAYE) and/or on a private pension.

This tells your employer or pension provider:

• how much tax-free income you’re entitled to
• how much tax to deduct from your pay or pension each month

How do I check my tax code?

You can check all of your tax codes at once, and how they were calculated, on your PAYE coding notice (also known as a P2). 

These are sent out by HM Revenue & Customs (HMRC), but not everyone gets one. 

If you didn’t, check:

• your payslip
• other HMRC forms, like your P45 or P60
• a pension advice slip 

Alternatively, you can check your tax code online at gov.uk. 

You'll need to sign in or create an account if you don’t have one.

How do I see if my tax code is right?

Your tax code is usually made up of numbers and letters. 

The most common tax code for the current tax year is 1257L.

This means that you’re entitled to the standard tax-free Personal Allowance of £12,570.

The number in your tax code is your tax-free personal allowance - the amount of money you can earn before you have to start paying tax on it - minus the zero on the end.

Your personal allowance may be higher or lower than £12,570 depending on factors like:

• if it's your only income
• any benefits you receive from work
• other income sources
• allowances or deductions HMRC has applied

The “L” means you’re entitled to the standard tax-free personal allowance for that job.

There are many different letters that could appear in your tax code, in addition to or instead of the numbers. 

They may refer to:

• your age
• your tax rate
• where you live
• any unusual circumstances that apply to you

You can see a full list of what each letter refers to at gov.uk.

What if I have more than one job or pension?

If you have multiple jobs or pensions, you’ll have more than one tax code.

HMRC will apply your tax-free personal allowance to the job or pension they consider to be your primary source of income. 

Other sources of income will be taxed at the basic rate (20%), higher rate (40%) or additional rate (45%), without any tax-free allowance.

So if, for example, you have a full-time job that pays £25,000 a year, and a part-time job that pays £10,000 a year, your tax-free personal allowance will be ‘used up’ on the full-time job, and you’ll pay tax on everything you earn in the part-time job. 

Your payslip for the part-time job will probably show a ‘BR’ tax code, meaning ‘basic rate’.

What should I do if my tax code is wrong?

If your tax code doesn’t reflect your situation, it might be because you’ve been given a temporary emergency tax code, for example if you’ve started a new job.
 
Once your new employer has details of your previous employment or pension, HMRC should correct your tax code automatically.

But if your tax code seems wrong and it’s not for an obvious reason like the one above, contact HMRC.

If you’ve paid too much tax, HMRC will write to you telling you that you’re due a refund. 

If it’s an overpayment in the current tax year, they’ll usually adjust your tax code so you have less tax due for the rest of the year. 

If you overpaid in an earlier tax year, they’ll usually send you a cheque or you can ask to have the money paid directly into your bank account.

If you’ve underpaid tax, HMRC might send you a bill or issue you with an emergency tax code, so that you pay more tax for a while.

Why are these mistakes happening?

UHY Hacker Young believes these errors are happening for many reasons, such as HMRC:

• assuming you still receive workplace benefits, like a company car or private healthcare
• making incorrect assumptions about additional income
• not having up-to-date information about how many jobs you have
• receiving late or outdated payroll information from employers

Taxpayers must be proactive

The takeaway from all this is that you’re responsible for checking your own tax code to make sure you’re being properly taxed.

You can manage and update your details via the HMRC app or your online tax account.

And you should also discuss any tax code issues with your employer.

“We are investing £500 million in digital services to help customers pay the right tax first time so fewer refunds are necessary,” HMRC said.

“Taking a few minutes to review your tax code could help make sure you’re not paying more than you need to - and that’s money you could put towards your bills, savings or day-to-day costs.”