Published On: Fri, Jan 10th, 2020

Tax code 1250L – what does it mean? How to check whether your tax code is correct | Personal Finance | Finance


A tax code is used by an employer or pension provider in order to work out how much Income Tax should be taken from a person’s pay or pension. It’s HM Revenue and Customs (HMRC) which tells them which code should be used in order to collect the right tax.

A tax code will normally start with a number and end with a letter, but what do they mean and how are they worked out?

Tax code: How the numbers are worked out

Gov.uk explains that the numbers in the tax code tell the individual’s employer or pension provider how much tax-free income they get in that tax year.

The first step in working out the numbers is HMRC works out the person’s tax-free Personal Allowance.

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Income that they have not paid tax on (such as untaxed interest or part-time earnings) and the value of any benefits from a job are then added up.

Step three sees the income that a person has not paid tax on taken away from the Personal Allowance.

What is left is the tax-free income that the individual is allowed in a tax year.

Finally, the last digit in the tax-free income amount is removed.

This then forms the number which can be found in the tax code.

L

“If you’re under 65 and earn less than £100,000 a year, the chances are this’ll be your code,” Mr Mills said. “It means you’re eligible for the basic tax-free Personal Allowance.”

C and S

“Your income or pension is tax using rates in Wales (C) or Scotland (S).”

T and 0T

“These codes signal other calculations are needed to work out your Personal Allowance. This might be because you earn over £100,000, which means you’ll lose £1 of your Personal Allowance for every £2 it is over, or you’ve reached £125,000, meaning your whole income will be subject to the higher rate of Income Tax.”

M and N

“M or N signals you’re using the Marriage Allowance, letting you transfer £1,250 (10%) of your Personal Allowance to your husband, wife or civil partner – if they earn more than you.”

“The person giving up some of their allowance will be issued with an ‘N’ code and the receiver will have ‘M’.”

BR, D0 and D1

“Work more than one job? You’ll find one of these codes on your payslip or pension notice.”

BR shows your income is being taxed at the basic rate (20 percent) and D0 the higher rate (40 percent).

D1 shows all your income is being taxed at 45 percent if you earn over £150,000 a year.

NT

“This stands for ‘no tax’, either because your total income is less than your Personal Allowance or because you’re a self-employed contractor who is liable to pay National Insurance but not Income Tax.”

K

“This means you have income that is not being taxed but it’s worth more than your tax-free allowance, either from owing tax from a previous year or receiving a company or state benefits like a company car.”

W1 and M1

“These are emergency tax codes and are temporary, used when HMRC doesn’t have enough information about you. W1 refers to weekly pay and M1 refers to monthly pay.

“This could be because you’re starting a new job and you don’t have a P45 from your previous employer, or if you’ve previously been self-employed.”

What to do if one’s tax code may be wrong

Should a person think their tax code is wrong, Mr Mills suggested trying to “keep calm”.

He continued: “If you’ve been under or overpaying tax, it can easily be sorted. HMRC can adjust your code either up or down to recover or repay tax.

“1 in 3 UK taxpayers are entitled to a tax rebate. If you think you might be one of them, you can use a free online calculator to check and apply for a refund.

“If you owe tax, then you will have to pay it. Don’t fret, you won’t have to pay it all at once as HMRC will agree a payment plan with you or let you pay off smaller amounts through your salary.

“Remember to update HMRC if your circumstances change such as moving job, going self-employed or getting a big salary bump.”



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