Your tax code is a crucial part of how HMRC determines how much tax you pay on your income. If your tax code is wrong, you could end up paying too much tax or too little—and in either case, it’s important to correct it as soon as possible. This detailed guide explains what a tax code is, how to understand yours, common errors that occur, and what steps to take if you think your tax code is incorrect, ensuring you pay the right amount of tax and avoid unexpected bills later.
What Is a Tax Code?
A tax code is a series of letters and numbers that tells your employer or pension provider how much Income Tax to deduct from your pay or pension. It reflects your personal allowance (the amount of income you can earn before paying tax) and any adjustments for benefits, expenses, or unpaid tax from previous years.
For example, the tax code 1257L is the standard code for most people for the 2024/25 tax year. It means you’re entitled to the full Personal Allowance of £12,570. The ‘L’ suffix indicates eligibility for the standard Personal Allowance.
How to Find Your Tax Code
You can find your tax code on:
- Your payslip (often listed near your National Insurance number).
- Your P60 (the end-of-year summary from your employer).
- Your P45 (if you leave a job during the tax year).
- HMRC letters or your Personal Tax Account online.
Common Reasons for Incorrect Tax Codes
Errors in your tax code can arise for several reasons:
- Starting a new job: Your employer might use an emergency tax code until they receive details from HMRC.
- Multiple jobs or pensions: HMRC may split your personal allowance between sources incorrectly.
- Benefits in kind: Such as a company car or private medical insurance that HMRC hasn’t factored correctly.
- Previous underpayments: HMRC might adjust your code to recover tax owed from earlier years.
- State Pension: HMRC may adjust your code if you receive the State Pension, which is paid without tax deducted at source.
How to Check If Your Tax Code Is Correct
Use the HMRC online tax code checker through your Personal Tax Account. This tool lets you see how your code was calculated and what adjustments have been made. Compare it to your circumstances:
- Are your benefits in kind accurately reflected?
- Have changes in income, pension, or job been accounted for?
- Does it match your personal allowance and the income bands applicable to you?
What to Do If Your Tax Code Is Wrong
If you believe your tax code is incorrect, take action promptly:
- Contact HMRC: Call the Income Tax helpline on 0300 200 3300 or use the online service via your Personal Tax Account. Have your National Insurance number and current tax code handy.
- Explain the Issue: Clearly state why you think your tax code is wrong, providing details of your income, benefits, and any changes in circumstances.
- Update Your Details: If your circumstances have changed (e.g. new job, benefits, pension), make sure HMRC is aware of these updates.
HMRC will review your case and, if necessary, issue a new tax code to your employer or pension provider. This should be implemented in your next payroll, adjusting the tax deducted going forward.
What Happens If You’ve Overpaid or Underpaid Tax?
If your tax code was wrong and you’ve overpaid tax, HMRC will automatically refund you through your salary or directly to your bank account, or they might send a cheque. If you’ve underpaid tax, HMRC will usually adjust your tax code to collect the underpayment in instalments over the next tax year. Larger underpayments might require a separate payment arrangement.
Correcting Past Years
If you discover that your tax code was wrong in previous years and you’ve overpaid tax, you can claim a refund for up to four tax years. Write to HMRC with details of the overpayment, including your National Insurance number, tax code, and relevant earnings information.
Practical Example
Imagine Lucy changes jobs mid-year and her new employer applies an emergency tax code (1257L W1/M1). This means she’s treated as if she’s only entitled to one month’s worth of the Personal Allowance rather than the full year’s. As a result, she pays too much tax in her first few months. Lucy checks her tax code online, realises the issue, and contacts HMRC. HMRC issues the correct code, and Lucy’s tax is adjusted in her next pay period to refund the overpayment.
Tips for Managing Your Tax Code Effectively
- Keep HMRC Informed: Report changes in income, benefits, or employment promptly to HMRC.
- Check Every Year: Review your tax code annually, especially if you have multiple sources of income.
- Use the Personal Tax Account: It’s the easiest way to view and update your tax code information.
- Keep Records: Save payslips, P60s, and other tax documents to cross-check with HMRC information.
When to Seek Professional Help
While many tax code issues can be resolved with HMRC directly, complex cases—such as multiple income sources, foreign income, or large benefit packages—may benefit from professional advice. An accountant or tax adviser can help you understand your tax position, liaise with HMRC on your behalf, and ensure you’re paying the correct amount of tax.
Conclusion
Your tax code is the key to ensuring you pay the correct amount of tax on your income. Mistakes can happen, but by understanding how tax codes work, checking yours regularly, and contacting HMRC promptly if you spot an error, you can optimise your tax position and avoid unnecessary payments or debts. Staying proactive is the best way to ensure that your tax affairs are in order and your finances remain healthy.
