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What is a PAYE code and what does it mean for your pay packet

March 26, 2014

PAYE codes are arguably one of the most misunderstood aspects of an employees payslip. In this article we explain what the numbers and letters mean and how they affect the amount you actually get paid.

A common question from our contractors is ‘ why is so much tax deducted from my gross pay?’. If you are an employee either through an Umbrella company or a normal employer you will have tax deducted directly from your earnings before being paid your ‘net’ salary.

HMRC gives your employer a tax code to show how much tax-free pay you should get each time you get paid – tax is deducted from anything above this. If your tax code is wrong, you could end up paying too much too much tax . An employer must use the tax code issued by HMRC, they cannot use a code that they think may be right for you.

A tax code is made up of letters and numbers and is shown on your payslip. As a general guide you need to multiply your tax code by 10 to get the total amount of income you can earn each year before being taxed.

From April 6th 2014 the personal allowance is increasing to £10,000 pa. This means that a normal tax code will change to 1000L. In other words the individual will be able to earn £10,000 before paying any tax.

But what do the letters that show on the tax code mean? The letters that appear on your tax code gives your employer further information on the type of allowances you receive or the rate of tax that should be charged eg:

BR or DO  – All your pay from this source is taxed at the basic rate (BR) or higher (DO) rate. This is because your allowances have already been used up against your other income.

K  – Total deductions exceed your allowances. If the untaxed income on which tax is still due (usually taxable benefits such as a company car or private medical insurance) is greater than your annual allowances you’ll be given a K code. This ensure that you pay tax in the excess. While other tax code numbers indicate the amount you can have tax-free, the number in a K code multiplied by ten broadly indicates how much must be added to your taxable income to take account of the excess untaxed income you received. For more details see HMRC’s website.

L  – You get the basic personal allowance for a person aged under 65

NT –   You pay no tax on this income

P –   You get the full age-related personal allowance for someone aged 65-74

T –  Used if your tax office needs to review your tax code – for example, if your tax affairs are complex. You can ask for a T code to keep your personal details confidential.

V  –  You get full age-related personal allowance for someone aged 65-75, and married couple’s allowance, and you’re likely to pay the basic-rate tax

Y  – You get the full age-related personal allowance for someone aged 75 or over

As mentioned earlier your employer must use the PAYE code issued by HMRC so it is important that you check your code is correct. In many cases PAYE codes have been found to be wrong. Make sure you check your coding notice thoroughly and if it is wrong you need to call HMRC and request that they make the necessary changes. You will receive a change of Tax Code by post to your home address and it will include full details of how it is made up. Your employer will also receive notice of the change but with no details, so do not make the mistake of expecting your employer to correct any mistakes – that is your responsibility.

If you think there is a mistake you should telephone HMRC immediately and they will be able to correct and re-issue the Tax Code.

For further information on PAYE as contractor or freelancer please call us on 0203 713 4530 or email contact@carringtonumbrella.co.uk

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