Understanding Employees' Tax Codes
Finally, making a move to add more employees to your payroll is equal parts advantage and responsibility. Since companies have varying work relationships with employees, different tax codes are applied to fit specific tax and compensation brackets. As you work with your staff across numerous business processes, you'll need to observe proper tax codes to comply with Her Majesty's Revenue and Customs (HMRC) tax policies in the UK.
The Importance of Tax Codes
When onboarding a new employee to work for your company, you need to consider which tax codes apply to them. You start with using their P45 and must update their tax codes at the start of every new tax year. If they don't have a P45, you'll need to consider the employee's personal circumstances beforehand.
These tax codes are necessary to help employers calculate tax deductions according to the pay as you earn (PAYE) system. Since the HMRC frequently issues revisions for these tax codes, you need to know how they are changed and affected throughout the year.
In this article, we'll share six tax codes and how they factor in your payroll payment practices.
1. 0T – Temporary Tax Code
This sets income to be taxed at 20%, which is usually applied to employees without a P45 or starter checklist. After a month or two, the HMRC typically submits a correction for employers to follow a more permanent tax filing procedure.
2. L – Personal Allowance
Employees are entitled to a personal tax allowance, depending on their earnings. This tax code is typically preceded with a number to determine the tax-free allowance gained. For example, a 1257L results in a 12,570 GBP amount taxed beyond this value.
3. BR – Basic Rate
Similar to the temporary tax code, it taxes income at a basic rate of 20 per cent. Additionally, BR is typical for second jobs where the total income is just below 50,270 GBP.
4. D0 – High Rate
In contrast to the BR tax code, a high rate applies to income deducted at 40 per cent, with no tax allowance applied. This is typical for second jobs where total income is above the 50,271 GBP benchmark.
5. W1M1 – Week 1 and Month 1
These are emergency tax codes that appear at the end of the employee tax code. It indicates tax deducted only on the payments in the current pay period and not on an employee's annual income.
6. K - Company Benefit, Pension Income, etc.
This tax code refers to different tax payments owed by the company over time. Besides personal tax allowance, it can cover pension income, company benefits, or even tax owed from previous years. The number succeeding the "K" tax code indicates the amount of additional value being taxed.
If you receive a "K" code even if you submit personal tax returns accurately, you may want to contact the HMRC. Otherwise, you may be paying too much tax ahead of your deadlines.
Staying aware of tax preparation policies is one of the many fundamentals of running a business. For this reason, it's necessary for companies to observe these rules with pinpoint precision. A good businessman is aware of the potential changes that concern their business' operations. However, great business owners know when to hire professionals to do their accounting for them.
At 1 to 1 Accountants, we offer professional accountancy services in England to help business owners streamline different business functions. We understand your needs to receive bespoke solutions that match your unique financial situation. Overcome your tax filing issues and schedule an online meeting with our financing experts today!