What You Need to Understand about Employees’ Tax Codes
Recent changes in the tax code have caused confusion amongst employers and employees alike. Understanding the basics of employees’ tax codes can help you comply with the law and maximize your employee’s take-home pay. In this blog, we’ll discuss what you need to understand about employees’ tax codes.
What Are Employees’ Tax Codes
Tax codes are used to determine how much tax is taken from an employee’s wages or salary. Every employee has a unique tax code (sets of numbers and letters), which is set by HM Revenue and Customs (HMRC). It is important for employers to be aware of the different types of tax codes, as this will help them to understand how much tax should be deducted from their employee’s wages.
How Do Employees’ Tax Codes Work
Tax codes are based on your current income, the amount of personal allowance you’re entitled to, and any other income you’re receiving, such as a pension or other taxable benefits.
Your tax code will be different from other employees, as it’s based on your individual circumstances. It's important to check your tax code regularly, as it can change over time. If your circumstances change, or if you receive a pay rise, your tax code may need to be updated. If you're unsure of your tax code, you should contact HMRC or speak to your employer to ensure that you're paying the correct amount of tax.
In the UK, all employees are required to fill out a tax return form each year. This document includes information about your income and deductions, such as allowances and expenses, which are used to calculate your total taxable income. Your tax code is based on this information and is used to calculate how much tax you should pay on your income.
What Do the Letters in Your Employee Tax Code Signify
Your tax code is a set of letters and numbers that identify the amount of tax you’re liable to pay.
The first set of letters in your employee tax code is the personal allowance code. This code is used to determine how much of your income is exempt from taxes. It’s based on your age, marital status, and other factors. For example, a single person under the age of 65 would have the code “1150L”.
The letters BR, D0 and D1 are also some of the most common.
- BR stands for ‘basic rate’ and means that you’re liable for the basic rate of tax on all of your income.
- D0 stands for ‘dividend only’ and means that you’re only liable for the tax on any dividends that you receive.
- D1 stands for ‘higher rate’ and means that you’re liable for the higher rate of tax on all of your income.
The next set of numbers in your employee tax code is the tax rate code. This code is used to determine the percentage of your income that is subject to taxes. For example, if your tax rate code is “20”, then you’ll be taxed at a rate of 20%.
The remaining numbers of your tax code are used to calculate the amount of tax you need to pay. The numbers are based on your personal allowance, which is the amount of income you’re allowed to earn each year before you need to start paying taxes.
The last set of letters in your employee tax code is the tax year code. This code is used to determine which tax year your taxes are based on. For example, the tax year code for 2020 is “2021”.
For example, 1250L is the most common tax code, which is known as the "basic rate" and applies to most people in the UK. Your tax code also includes an ‘L’ if you’re entitled to Married Couple’s Allowance, or an ‘X’ if you’re a non-taxpayer. Higher earners may have a different code, such as 1250M or 1250H, which indicates that a higher tax rate should be applied to their income.
Another example is if your tax code is BRT1000, it means that you’re liable for the basic rate of tax on all of your income, and your personal allowance is £10,000.
Now that you understand the meaning behind the letters and numbers in your employee tax code, you’ll be able to better understand your tax situation. You’ll know how much of your income is exempt from taxes and what tax rate you’ll be subject to. This knowledge can help you make informed decisions about how to manage your taxes and make sure you’re paying the correct amount.
Finding reliable and trustworthy accountancy services can be a challenge, especially when it comes to managing your employees’ tax codes. At 1 to 1 Accountants, we understand that individual tax codes can be complicated and difficult to understand. Our team of experienced and qualified accountants can provide you with the necessary advice and guidance to ensure that your employees are paying the correct amount of tax and that you are compliant with HMRC regulations. Let us provide you with the most appropriate advice and solutions to your tax and payroll needs. Contact us today to get started!