The new tax year begins on 6th April 2018 and therefore this means new PAYE tax codes. The most common will be tax code 1185L.
Every year millions of codes are incorrect so you must check your tax code or you could end up owing HMRC.
Why is the most common tax code 1185L
The personal allowance for the tax year 2018/19 is £11,850.
Most individuals have just one source of income. They receive no benefits from their employee. And they have no allowances other than the personal allowance.
These individuals are entitled to one personal allowance of £11,850.
HMRC take the personal allowance and drop the last digit. Therefore this results in the number 1185. The letter L is added as it means you are entitled to the standard tax free personal allowance. Therefore resulting in the tax code 1185L.
There are numerous other allowances which can affect the tax code 1185L.
As an example we pay Chartered membership subscriptions annually to the ICAEW. For illustration purpose let us say this is £500.
The total allowances would then be £12,350. Using the method above HMRC would convert this into a tax code of 1235L.
List of HMRC approved subscriptions
Deductions work in a similar way to allowances. The most common deductions being benefits provided by an employer.
As an example let’s say the Chartered Accountant above has medical benefit of £385. They also have a van benefit £3,350 with private fuel £633 thrown in. Company Van Tax 2018.
The tax code would be 798L. The personal allowance has been reduced down to £7,980.
(Calculation is £11,850 + £500 – £385 – £3,350 – £633 = £7,982)
Why is this important?
Your personal allowance tells your employer how much tax free income you are entitled to.
A tax code 1185L is entitled to £11,850 tax free per annum. This would be spread over the year so weekly the tax free amount is £227 and monthly it is £987.
A tax code in our example of 798L is entitled to £7,980 tax free per annum. This is spread over the year so the weekly tax free amount is £153 and monthly it is £665.
Earnings over the tax free amount are taxed at 20%. Therefore the 2nd employee is paying an additional £64 PAYE every month compared to the employee on tax code 1185L.
How to find out what your tax code is
HMRC should have sent you your PAYE coding notice (P2) for 2018/19 which includes your tax code. It also explains any adjustments they have made if you don’t have tax code 1185L.
If you don’t have a P2. You can check your payslip. You’ll need to wait until the new tax year but the code will be on there.
Alternatively you could phone HMRC, the income tax helpline is 0300 200 3300.
Incorrect tax code
If you have an incorrect tax code you should contact HMRC immediately on 0300 200 3300.
Contacting them sooner will minimise the tax mistake so don’t delay.
Unfortunately HMRC do make mistakes with the tax codes during the tax year. But more often than not when they do their end of year tax reconciliations they spot these mistakes.
So if you have underpaid tax they will eventually realise and they will want paying. Don’t worry though as they are really good at arranging repayments over a longer period.
If you are overpaying again don’t worry as they will pay you what you are owed.
Tip: HMRC will not confirm underpayments or overpayments with you by email. You can discuss it with them over the phone but confirmation will ALWAYS be by post. Remember this if you get an email claiming to be from HMRC saying you owe or are owed tax – this will be a fraudster trying to scam you!
Why do HMRC get tax codes wrong
Tax code 1185L is straight forward to understand. Even with the adjustments shown in the examples previously the tax code is easy to calculate.
What goes wrong is when HMRC does not have all of the information. This occurs when things change in the year or when you have multiple sources of income:
- Changing jobs
- Have more than 1 job
- Have a job plus pension income
- Started your first job
- Left your job during the year
- Retired during the year
- Not informed HMRC about new or changes to allowances, e.g subscription increased
- Not informed HMRC about benefit changes, e.g van benefit ceased during the year
Multiple tax codes
Every source of income has a tax code. So if you have 2 jobs plus a private pension income you would have 3 tax codes.
The largest revenue source would typically have the personal allowance allocated against it. So that may have tax code 1185L. The second job and the pension income would typically have a tax code BR which means to tax at basic rate.
For more examples of tax coding notices see HMRC website
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