How to check your tax code and correct it if necessary

Nick Daws highlights the importance of checking your tax code to avoid overpaying or underpaying tax, ensuring accurate deductions by HMRC.

Today I’m spotlighting a piece of official data about you that might seem dry and boring, but is actually crucial to ensuring you don’t pay more tax than you need to.

Your tax code is set by HM Revenue and Customs (HMRC). It determines how much income tax is deducted from your salary, wages or pension before you receive it. 

Understanding your tax code and ensuring its accuracy can prevent you from overpaying (or underpaying) tax.

What is a tax code?

A tax code is a combination of numbers and letters that helps your employer or pension provider calculate how much tax to deduct from your income. 

For example, a common tax code for the 2024/25 tax year is 1257L. This indicates that you are entitled to a tax-free personal allowance of £12,570, with tax due on any income you receive over this. 

The letter in your tax code provides additional information about your circumstances, such as whether you have more than one source of income or are being taxed on an emergency basis.

How to find your tax code

Your tax code can be found on any of the following:

• your payslip

• your P60 or P45 (for those who have changed jobs or retired recently)

• letters or emails from HMRC

• your personal tax account on the HMRC website

Deciphering your tax code

Here’s a breakdown of what the numbers and letters mean:

Numbers: Multiply the number in your tax code by 10 to calculate your tax-free allowance. For example, 1257 means you can earn up to £12,570 a year tax-free.

Letters: These Indicate specific circumstances. 

L: standard personal allowance

M: you’ve received a marriage allowance transfer

BR: all income is taxed at the basic rate (20%)

NT: no tax is deducted from your income

S: taxpayers living in Scotland

C: taxpayers living in Wales

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Common reasons for incorrect tax codes

Your tax code might be wrong if any of the following apply:

• you’ve started a new job

• you’ve received a pay rise or bonus

• you’re receiving income from multiple sources

• you’ve claimed or stopped claiming benefits like marriage allowance

• HMRC hasn’t been updated about changes in your circumstances, such as retirement or moving abroad

What to do if your tax code is incorrect

Check your tax code: Review your payslip and/or other relevant documents to confirm your tax code.

Use the HMRC tax code calculator: This tool is available on the HMRC website. It  can help you determine if your tax code is correct, based on your circumstances. It will also reveal your annual tax-free allowance.

Contact HMRC: If you suspect an error, contact HMRC directly. You can do this by any of the following means:

• call 0300 200 3300

• use the online chat service on the HMRC website

• update your details through your personal tax account

When contacting HMRC, have the following information ready:

• National Insurance number

• details of all income sources

• recent payslips or P60s

Of course, if you have an accountant, you may prefer to ask him or her to handle this for you. Accountants are well accustomed to dealing with these matters and will normally be happy to call HMRC on your behalf.

Adjustments and refunds

Once HMRC updates your tax code, your employer or pension provider will use the new code in your next payslip. If you’ve overpaid tax, HMRC will issue a refund automatically or else adjust your tax deductions in future months.

Preventing future errors

To avoid future tax code errors:

• inform HMRC promptly about changes in your income or circumstances

• regularly check your payslip and tax code notifications

• use your personal tax account to keep track of your tax records

By staying proactive and understanding your tax code, you can ensure your finances remain in order and avoid any unpleasant surprises when it comes to your taxes.

As always, if you have any comments or questions about this article, please do leave them below. 

Nick Daws writes for Pounds and Sense, a UK personal finance blog aimed especially (though not exclusively) at over-fifties.

Photo credits: Pexels