Tax codes on pay slips may appear as a seemingly random combination of letters and numbers, but they play a crucial role in determining the amount of tax deducted from your income. If these codes are inaccurate, you could potentially be eligible for a tax refund amounting to thousands of pounds.
While it’s common to overlook this code when receiving your wages, it is essential to ensure its correctness based on your circumstances. The HMRC calculates each individual’s tax code by considering their tax-free Personal Allowance and any income that has not been subject to taxation.
This calculation encompasses various elements such as untaxed interest, part-time savings, and the value of benefits like company-provided vehicles. Presently, the most frequently used code for individuals with a single job or pension is ‘1257L’.
Within this code, the ‘L’ signifies eligibility for the standard tax-free Personal Allowance, which currently stands at £12,570, hence the code ‘1257L’.
Government guidance states, “You are entitled to the standard tax-free Personal Allowance of £12,570, but if you receive medical insurance from your employer, it affects your Personal Allowance and subsequently alters your tax code.”
“The medical insurance benefit of £1,570 is deducted from your Personal Allowance, resulting in a tax-free allowance of £11,000 and a corresponding tax code of 1100L,” the advice continues.
Additionally, pay slips may feature codes such as ‘W1’, ‘M1’, or ‘X’, which typically indicate emergency situations arising from life events like commencing a new job, acquiring company benefits, or starting to receive a State Pension.
If your tax code begins with a ‘K’, it suggests an alternative tax calculation method, possibly due to settling the previous year’s tax liabilities using your current income or pension.
The Government advises, “Your employer or pension provider deducts the tax owed on untaxed income from your earnings or pension, even if the income is paid by another organization.”
Furthermore, it states, “Employers and pension providers are limited to withholding no more than half of your pre-tax earnings or pension with a K tax code.” If you suspect incorrect taxation on your income, the Government offers an online form to facilitate potential refund claims.
According to specialists at RIFT, the average tax rebate in the UK amounts to £3,000 based on research data from an average of claims over a four-year period.
To verify your tax code for the current year, you can check it here and access the HMRC website here.