There are four main tax bands – basic rate, higher rate, additional rate and zero rating. These are the rates that apply to different income levels.
You don’t pay any tax on earnings up to £10,000. If you earn over £50,000, you’ll start paying HMRC at the higher rate. This is the same rate as corporation tax.
If you make over £150,000, you’ll be charged at the highest rate. This is known as the ‘additional rate’.
The lowest rate applies to people earning under £11,850.
Zero rated taxpayers do not pay any tax. They include sole traders, self employed people, landlords, charities and pensioners.
What is a tax code?
A tax code is a law that sets out taxes levied by government. Depending on what type of entity you’re dealing with, there are different types of tax codes. For example, some countries, such as the United States, impose both income and sales taxes. Others, such as Canada, have an income and a value added tax (VAT).
How does the tax code function?
A tax code is used to calculate what tax should be paid on your salary. This is called the tax free amount. If you earn less than this amount, you don’t pay any tax. However, if you earn more than it, you’ll have to pay income tax.
Your employer must tell you what tax code you’re entitled to. For example, if you’re self employed, you might use the Self Employed Income Scheme. You can also ask your accountant for help.
An L code is used to determine how much tax you owe each month. This is known as your annual allowance.
If you make over £100,000 per annum, you might be able to claim a personal allowance. This means that you won’t have to pay any tax on your earnings above this figure.
You can find out what your tax code is by checking your P60 form. Alternatively, you can go online to the HM Revenue & Customs website and enter your name and date of birth. From there, you can see what your tax code is and what your annual allowance is.
Cumulative tax codes
Employees who make under £10,000 per year are eligible for a cumulative tax code. These codes allow workers to reclaim any taxes paid since April 6th 2018.
The government introduced the Cumulative Tax Code scheme in response to the introduction of the National Living Wage (NLW). From April 6th 2018, the NLW increased the national wage floor from £7.20 to £9 per hour. In addition, the government announced that it would introduce a new tax code called BR1A. This code applies to employees who earn over £50,000 per calendar year.
The government expects that the BR1A code will help reduce the burden of paying income tax on high earners. However, the government does not anticipate that the BR1A will affect the tax liability of low-paid workers.
Dealing with in-year employee tax refunds
This situation usually occurs if you are working for yourself and you haven’t been paying enough corporation tax to HM Revenue & Customs (HMRC). In this case, you might find that HMRC has sent you a notice telling you about a repayment plan.
If you do receive such a letter, it doesn’t mean that you have to repay the money immediately. Instead, you should contact HMRC to see whether there is anything you can do to reduce the amount you have to pay.
You should consider contacting HMRC again once you’ve had a chance to think about it, because you might want to take advantage of some of the options they offer. For example, you might be able to apply for a refund if you’re entitled to one.
You might also be able to claim a reduction in your future payments, depending on the circumstances.
In addition, you should check whether you qualify for any state benefits that could help you deal with the extra costs.
Where can I discover the tax code of my employee?
Your employer should send you an updated copy of the tax code after it processes your pay slips. This includes the following information:
• Code number
• Reference number
• Taxable salary amount
• Taxable allowances
• Tax payable
You can view the current tax codes by logging into HM Revenue & Customs’ Pay As You Earn system. To access this, go to www.payeearn.hmrc.gov.uk/en/taxcode.
If you’re using payroll software like Xero, you’ll receive an automatic email notification whenever there are changes to the tax codes.
Will the tax code change?
Your employee’s code number may be different next year. You’ll receive notification about it on P6.
Any changes to your employee’s tax code will always be notified to them on P6, and explained to them on P7.
Changes to your employee’s tax codes will be explained to them in writing on P7.
Tax codes are updated every year, so make sure you know what your employee’s tax code is, otherwise, you could end up paying more tax.
Employees should contact HMRC if there is a discrepancy in their tax code.
Emergency tax codes
Construction workers and tradespeople often end up being placed on an emergency tax code. These are temporary tax statuses that give people who don’t qualify for another type of tax status an opportunity to pay taxes.
There are four main types of tax codes: 1257W1, 1257M1, 1257X, and 1257Y.
Other tax codes you may encounter
If you’re looking for another way to reduce your taxable income, there are other ways besides filing a tax return. Here are some other tax code options to consider.
You might qualify for certain tax credits based on your age, number of children, marital status, etc. You could also qualify for tax deductions that allow you to deduct expenses related to home ownership, such as mortgage interest, property taxes, insurance premiums, repairs, maintenance, etc. These are called “tax expenditures.”
There are also special tax rates for different types of taxpayers. For example, married couples filing jointly generally pay lower tax rates than single filers do. If you’re self-employed, you may be able to claim a deduction for certain expenses. And if you work for yourself, you may be eligible for a pass-through entity tax rate.
Some states offer tax incentives for hiring workers. In fact, many employers use state incentive programs to attract employees.
In addition to tax deductions, you may be able access tax credits. Tax credits are often used to encourage economic development, promote energy efficiency, support education, provide health care, help low-income families, and fund infrastructure projects. They are usually refundable, meaning that even people who don’t owe any federal income tax still receive a credit.
Employees with another job
An employee who has another job is allowed to claim expenses for work done while away from home. However, it must be shown that the second job provides sufficient income to cover the costs of commuting, accommodation and subsistence. If you do not meet this criteria you will be charged tax on the difference between what you earned and how much you spent.
The amount of expenses you can claim depends on whether you are single or married, claiming child care expenses, and whether you are self-employed or employed by someone else. You cannot claim expenses for children under 16 unless they live with you.
If you are self-employed, you can claim expenses for yourself and your family members. This includes employees, partners and spouses. Your partner does not need to be earning a wage to qualify.
You can claim expenses for your children aged 3–16 if they are staying overnight at least four nights per month. You can claim up to £1,100 per child per year.
If you are employed part-time, you can claim expenses even if you do not work every day. You can claim expenses for each hour worked. For example, if you work 40 hours per week, you can claim £2.20 per hour.
If you are unemployed, you can claim expenses if you are looking for work. You can claim up £3,600 per year.
If your employer offers childcare vouchers, you can use these to pay for childcare costs. These include nursery fees, babysitting and school trips.
What if I use the wrong tax code?
If you are self-employed, it is important to know what tax code to use when calculating your personal income tax liability. You must apply the correct tax code to each transaction where you earn taxable income. This includes transactions such as invoices, payments, salaries, interest, dividends etc.
HM Revenue & Customs (HMRC) will first try to recover the unpaid amount from you, before seeking reimbursement from your employees. However, if HMRC cannot recover any additional amounts from you, it will seek repayment from your employees. If they do not pay, HMRC can make a claim against them personally.
Frequently Asked Questions
What if I enter the incorrect tax code?
The tax system is complex, and there are many different types of tax codes. A tax code gives us information about how much we owe the government each month. There are three main kinds of tax code – Income Tax Code, Capital Gains Tax Code, and Corporation Tax Code.
An Income Tax Code tells us what percentage of our earnings we must pay in income tax. An example of an Income Tax Code is 10%, meaning that we must pay 10% of our earnings in income tax.
A Capital Gains Tax Code tells us whether we have capital gains tax to pay. An example of a Capital Gains Tax Code is 0%. This means that we do not have capital gains tax to worry about.
A Corporation Tax Code tells us what corporation tax we must pay. An example of this type of tax code is 20%. This means that we must pay 20% of our earnings in corporation tax.
Am I due an OT tax code tax rebate?
If you have had an OT (overseas travel) tax code, it is possible that you are due a tax refund. However, it depends how long ago you travelled overseas. You might be eligible for a rebate if you have been paying taxes wrongly and haven’t received a tax rebate already.
The government says that anyone who has an overseas tax code and paid tax under that code during the previous four years, is entitled to a rebate. This includes people who have used the overseas tax code incorrectly or deliberately.