Crack your tax code and get to know yourself better

Sorting your Ls from your BRs is not as daunting as it looks, and it may even save you money, as Anne Redston explains

Most people have absolutely no idea what their Inland Revenue coding notice is all about.

If you are an employee or a pensioner you get one of these every year, and many of us ignore it because it is so hard to understand.

Despite its daunting appearance, all it does is tell you how much tax will be deducted from your salary during the year - and why.

Spending a little time trying to crack the Inland Revenue code is worthwhile, because if it is wrong you may end up paying too much tax.

n Most codes are a number followed by a letter, for example 220L. The number represents the tax allowances to which you are entitled, meaning the amount of money you can earn each year before you have to pay any tax on it. Confusingly, the last number is left out (this is a code, after all!). So if your allowances total pounds 2,203 then your code would begin with 220.

n The letter indicates what sort of tax allowance you receive:

L is the single person's allowance, worth pounds 4,335 in the current tax year.

H is the married couple's allowance, worth pounds 5,125. This is also given to single parents.

P is the age allowance for a single person, worth pounds 5,980.

V is the age allowance for a married couple, worth pounds 5,195.

So a single person might have 433L as their tax code this year, and a pensioner 598P.

n However, your code may not be this straightforward.

Codes are also used to collect tax on benefits provided by your employer, such as company cars, cheap loans and health insurance. These amounts are deducted from your tax allowances and are shown on the right hand side of your coding notice.

Small amounts of tax overpaid or underpaid from previous years may also be taken into account. Deductions are shown on the right hand side of the coding notice and repayments on the left.

Some allowances reduce the amount of tax you pay on the top slice of your income. So, if you are a higher-rate taxpayer, they reduce the amount of tax you pay at 40 per cent.

But other allowances only give relief at a reduced rate. For 1999/2000 the rate for mortgage interest relief at source (Miras) and the married person's allowance is only 10 per cent.

The Inland Revenue's system deals with this by giving you the full allowance on the left hand side of the coding notice, and then reducing its value on the other side. This is called an allowance restriction.

Age allowances are tapered, which means they are withdrawn gradually, depending on a person's income. So a single pensioner aged 70 with an income of pounds 5,720 or less will receive the full age allowance. But one of the same age with income of pounds 16,800 or more will receive only the single person's allowance of pounds 4,335.

Pensioners with an income between pounds 5,720 and pounds 16,800 will be given part of the allowance.

n There are also a few special code letters. These are:

BR: all your income will be taxed at the basic rate of tax, without any allowances. This might happen if you have more than one employment, so that allowances are given against your earnings from the other job.

D: all your income will be taxed at the higher rate. This is only likely to happen if your basic-rate band and allowances are absorbed by other earnings.

NT: no tax is deducted from your earnings. This will apply, for example, if you go overseas but are still being paid by your UK employer.

K: this means that your taxable amounts exceed your allowances, so that instead of deducting the total from your earnings, it has to be added back, thus increasing your taxable income. Employees with large company cars commonly have K codes.

If you think your code is wrong, you should contact your tax office (ask the payroll department where to call, or if you are a pensioner speak to the local tax office in the phone book). The tax office will investigate and, if necessary, amend the code and tell your employer. The amount of tax you pay will be adjusted so it is correct before the end of the tax year.

When you look at this year's coding notice, which you probably received in April, you should see an increase in your personal allowance, whether you are single, married or a pensioner. However, the married couple's allowance has fallen to 10 per cent from 15 per cent. Thus the overall effect of this year's changes may be negative rather than positive.

There is some good news. The Chancellor surprised everyone in this year's March Budget by introducing a starting 10 per cent rate of tax, and he also abolished tax on mobile phones. You are likely to receive a second revised notice taking account of these changes, and this would be a good opportunity to check that the other parts of your coding notice are correct. You might save yourself some unnecessary tax!

n Anne Redston is a Chartered Tax Adviser with Ernst & Young.

Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific
In this the person to restore our trust in the banks?

In this the person to restore our trust in the banks?

Dame Colette Bowe - interview
When do the creative juices dry up?

When do the creative juices dry up?

David Lodge thinks he knows
The 'Cher moment' happening across fashion just now

Fashion's Cher moment

Ageing beauty will always be more classy than all that booty
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

Health fears over school cancer jab

Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

'I forgive everyone, but I don't forget'

Fifa president Sepp Blatter issues defiant warning to opponents
Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

Weather warning

Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

High hopes for LSD

Meet the volunteer users helping to see if it cures depression and addiction
German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

Saving Private Brandt

A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral