Your guide to cracking those HMRC tax codes

As millions of (often baffling) letters are sent out..

EVERY year the taxman sends out around 28 million tax codes to employees and pensioners — with the bulk landing around this time of year.

The code tells you how much you can earn before you have to pay any income tax. Your tax code notice might seem dull but if the numbers and letters are wrong it can mean you pay too much, or too little, tax.

So it is vital you check it now before you end up hundreds of pounds out of pocket — or with a nasty tax bill. One Money Mail reader now has to pay back £90 a month for nearly three years after a mix-up with her tax code means she owes HMRC nearly £3,000.

She fell foul of the system when she started a second job as a teaching assistant in a local school — and received the full personal allowance twice. The taxman told her in December that she owed £1,631.80 for the tax year ending April 2018 and £1,251.24 for the tax year the following April.

Problems with tax codes most often arise if you have several jobs or have changed employer during the year.

If you have savings interest from banks, building societies or National Savings you can also get caught.

Joanne Walker, technical officer at the Low Income TaxReform Group, says: ‘It is important to check your tax code because it is fairly common for them to be wrong. Your code is only as good as the information HMRC has on you.’

But you, not HMRC, are responsible if it is wrong, even though it is the taxman’s mistake.

The code is made up of several numbers followed by one, two or three letters. To break it, you need to know what these numbers and letters mean.

If you put a ‘£’ sign in front of the number and a zero at the end, you’ll have the amount HMRC deems you can earn a year before you pay tax.

Most people in the UK are entitled to a personal allowance — the amount you can earn without being taxed.

It starts at £12,500 for this tax year. If you keep the full allowance, your code number will be 1250.

The number is followed by a letter. The most common is L, and means you are entitled to the personal allowance and no more.

If you work and have a pension, you may have a normal code on your job and a BR code on your pension. THIS

means you have used up your personal allowance with your job and pay basic rate (BR) tax on the whole of your pension.

If you have an OT code, get it changed as soon as possible. It means all your income is taxed. This could happen on changing jobs if your employer does not have enough details to give you a tax code.

The most common code is 1250L but plenty of allowances can change it. HMRC’s usual starting point is 1250 which it alters according to your circumstances.

It lists things that will raise it — such as tax-deductible job expenses, personal savings allowance or marriage allowance. These are then totted up. The total is then cut back by things which will reduce it such as your state pension or tax you owe from previous years.

If, for example, you have a state pension of £9,000, you end up with a personal allowance of £3,500 (£12,500£9,000) and the tax code 350L which is sent to your private pension provider. It will tax all your pension except the first £3,500.

You could also run into problems and end up with the wrong code if you have more than one job. Each employer might not know what the others are doing tax-wise so HMRC will not have correct information.

Or when you switch jobs the correct information on what you have earned so far in the tax year, how much tax you have paid to date has not reached your new employer — or your allowances might change and not show up in your tax code.

Savings income can also cause problems. You can earn £1,000 as a basic rate taxpayer in savings interest from ordinary accounts outside an Isa before you have to pay tax. Higher rate tax payers get £500.

If you earn more, your code will be adjusted. But your code shouldn’t change if your interest is below this.

In some cases, savers have paid too much tax. For example if your savings provider tells HMRC it has paid you £750 interest and you also give it the same figure, it can end up that the figures are added together so it looks as if you received £1,500 interest and you pay too much tax.

You will also see your code adjusted if you earn more than £2,000 a year from dividends from shares in funds held outside an Isa.

If you think your code is wrong call HMRC on 0300 200 3300. If you have a personal tax account with HMRC, go to