Do You Know How To Decipher Your Tax Code?

The importance of knowing your tax code cannot be denied. Tax codes are a crucial yet often misunderstood aspect of the financial world, leaving many people puzzled by their true meaning. We have previously unravelled the secrets of tax codes, revealing their purpose and breaking down their complexities. Tax codes play a vital role in determining how much of your income is taxed, so understanding them is key to managing your finances effectively.

What about if I’m an Additional and higher-rate taxpayer?

We always advise that additional and higher rate taxpayers, who are making large pension contributions, take care with their tax code. Why? Because it is sometimes automatically assumed that a similar contribution will be made in the following year and as a result your tax code may change. 

Who is responsible for checking my tax code is correct?

Most UK employees receive a notice of tax coding from the HM Revenue & Customs at least once a year. Many receive the letter and assume that as it is from the Tax Office and their employer looks after their tax it must be correct and dispose of the letter without giving it consideration.

A PAYE notice of coding is an important document as it determines the amount of tax which will be deducted from an employee’s income. Your employer is not responsible for ensuring that your coding notice is correct. Your employer is only responsible for ensuring that the coding you have been given is used to deduct tax from your earnings before they are paid to you.

The responsibility for ensuring that the coding notice is correct is your responsibility. It is quite common for incorrect or out-of-date coding notices to be issued and if this occurs your employer may be deducting too much tax from you each month, or you may not be paying enough tax.  If this is identified at a later date you could be the subject of a tax enquiry. It is therefore essential that all changes to your tax code should be checked each year.              

For example, an additional rate taxpayer will have lost their personal allowance but possibly regained it with a large  pension contribution. If HMRC assume that you will make a maximum pension scheme contribution again this year then they will give you the tax relief monthly over the year rather than a lump sum refund when you file your tax return. If you do not intend to make a maximum pension contribution this year or even a smaller contribution you need to contact HMRC immediately and get your code changed otherwise you will get a nasty shock when you file your tax return for 2024/25.  

You may also receive benefits as part of your remuneration package such as a company car, private medical insurance etc. It is normal for HMRC to adjust your code to collect the tax on these benefits monthly.  

If you receive other income which is received gross of tax, such as rental income, the Inland Revenue may include a deduction in your tax code to collect the tax due from this income from your salary or pension. This effectively means you would be paying the tax early. You can therefore request that this deduction is not included in your tax code. A simple phone call to the Inland Revenue is often sufficient to remedy the situation. However, if in any doubt you should seek professional advice.  

It’s important to check that your tax code is correct. Ensuring that your tax affairs are in order will help you to avoid any nasty surprises at year end or, when Inland Revenue reconcile your records.

If you have any queries about your coding notice for the 2024/25 Tax Year, or if you’ve already noticed an issue in your code and you would like support and advice on how to rectify the issue, we are here to help. Please do not hesitate to get in contact with Paddy Harty, a member of our Private Client team or your usual AAB advisor.