Martin Lewis gives advice on checking your tax code
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The tax year end is fast approaching, meaning many may well be looking to take advantage of allowances they have each tax year. It also means some changes will take place – and this includes changes to tax codes.
HMRC has now started to send out letters relating to the Personal Allowance – which is the amount a person can earn as taxable income prior to it being subject to Income Tax.
From April 6 – when the new tax year for 2021/22 begins – the Personal Allowance will rise.
Currently, the standard Personal Allowance is £12,500.
The Personal Allowance threshold will rise by 0.5 percent in April 2021.
According to calculations from the Low Incomes Tax Reforms Group (LITRG), it will rise to £12,570.
The tax code is what is used by an employer or a pension provider to work out how much Income Tax needs to be taken from the person’s pay or pension.
It’s HMRC which tells determines the code to be used for collecting the right tax.
However, some may wish to double check their tax code is correct.
It is possible to do this online, via a tool on the Government website.
The service covers the current tax year only, however. This means April 6, 2020 to April 5, 2021.
Among the things which the “Check your Income Tax for the current year” tool can be used for is finding out what the user’s tax code is, and if the tax code has changed.
How the tax code is worked out and how much tax the person is likely to pay can also be checked.
The Government website also explains what a tax code means, and how it is worked out.
Tax codes normally start with a number and end with a letter, and the one that is currently used for most people who have one job or pension is 1250L.
The number part relates to the £12,500 Personal Allowance, and L means the person is entitled to the standard tax-free Personal Allowance.
“The numbers in your tax code tell your employer or pension provider how much tax-free income you get in that tax year,” the Government website states.
To derive the number, HMRC works out the person’s tax-free Personal Allowance.
Income which the person hasn’t paid tax on – such as untaxed interest or part-time earnings – and the value of any benefits from their job, for example a company car, are then added up.
Income that any person may not have paid tax on is then taken away from the Personal Allowance.
What is left is the tax-free income they are allowed in a tax year, and the last digit in the tax-free income amount is removed.
Meanwhile, the letters that are in the tax code will refer to the person’s situation and how it affects their Personal Allowance.
The full list of the letters and what they mean can be accessed on the Government website.
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