Tax codes. They’re frustrating. They’re confusing. And to most people they can seem a downright bore. What do my tax codes mean? Am I being taxed the right amount? Am I missing out on potential benefits that I am not even aware of? That is why we have created this basic tax code guide to help highlight and define some of the more common tax codes that both individuals and companies tend to come across.
L Tax Codes
The most common tax code. If tax codes were ice cream flavours, this here is your classic vanilla. L tax codes refer to the standard amount you can earn before income tax kicks in. This currently sits at £12,750 for the financial year.
The numerical code preceding the “L” denotes the amount you can earn before income tax kicks in – the earnings divided by 10. Therefore, until 2023 this will be 1257L.
This common tax code only applies to people under the age of 65 that are eligible for the standard tax-free Personal Allowance.
Simply put, this is what you (or your employees) earn before the taxman starts taking part of your wage.
Based in Scotland? Then the “S” rather than an “L” code will more likely be applicable.
Why? You guessed it – Scottish tax rates rather than UK tax.
BR, D0 and D1 Tax Codes
These codes are less comparable to an ice cream flavour but more so the toppings or boujee waffle cone that your scoop of choice comes with.
This is one for those of you treating your creative outlet as more of a side gig than a full time thing. Or perhaps your creative business is your full time earner and you have a part time job on the side to make do. Either way, these codes refer to those with second jobs/incomes.
Typically you will receive a tax code for each bit of income that you receive. It is important that your “main” income is known to HMRC to allow them to apply the correct tax deductions from it. No one wants to have a load of hidden fees come back to bite them on the backside further down the line. (One of the benefits of hiring an accountant, we might add…).
All other incomes will be taxed without allowance. Those paying basic rate (see above) will have their extra income sources fall under the BR code. Those paying the higher rate (see below) will be given a D0 and perhaps a D1 code (depending on whether an additional rate applies).
T Tax Codes
Ice cream flavour: Venetian café style affogato. This is the tax code that you’ll be familiar with if you’re raking in a very healthy amount of mula. It is also the point where your tax becomes a tad more complex…
Essentially, everything that you earn over £100,000 will see half go towards tax. So for every ten pounds you earn, it’s a fiver in your pocket. People in this bracket will be put on a T code (preceded by a figure showing your remaining level of allowance).
Here is where the T tax code guide becomes a tad more complex. Once that level of income surpasses £125,140, a new T code comes into play… (We know, it’s no wonder people tend to throw these calculations at us accountants.) At this point the allowance vanishes and you will be taxed on all of your income. Those whom this applies to are put on a 0T code.
Still following? If not, give us a shout and we can help clarify the matter.
K Tax Codes
This is the part where employee benefits and the like come into play. K tax codes are used in relation to untaxed income that does in fact need to be taxed. Essentially the taxman will look at anything that a company is providing an individual that could be perceived as an income and slaps a tax on it.
Let’s look at an example…
If an employee were to be given a swanky new, lightning blue Bugatti with fresh leather seats and petrol included, this would most likely be seen as a significant additional income by the taxman. Therefore, they will put a price on it and you will be required to pay that through taxes.
This logic influences the K codes’ numerical precursor as well. The amount received from company benefits it subtracted from the personal allowance. For example, £5,000 worth of benefits would leave your L code at 875L.
If you are deemed to have taken advantage of over £12,750 worth of benefits, this is where the K code comes into play. If your company Bugatti is deemed to be worth £20,000 in the eyes of the taxman (dodged a financial bullet if so) then your code would be 725K. This means that you need to pay income tax on all earnings, plus that extra £7,250. So maybe think twice about handing out sports cars willy nilly.
What ice cream flavour is it? Pistachio. If you’re eating it then you’re probably doing quite well. Yet no one really enjoys the experience.
How To Change An Incorrect Tax Code
If you believe that you have the wrong tax code, it is important that you get hold of HMRC as soon as you can. Contact HMRC through their website armed with your tax reference and National Insurance number.