Starting point for establishing which Tax Code you should be on.
Everybody is entitled to some Tax Free Income and your Tax Code is the tool that operates this system. From birth to death and working or not working EVERBODY has a tax free allowance. It will be operated correctly only if the wages department that does your wages are doing it correctly and the information is correct that is put onto their system! If you’re receiving state pension, private pension or a mixture of the two, it will only be operated correctly, only if the pension provider has the correct tax allowance information for you. Everybody starts each New Tax Year with a Tax Free allowance which decides the tax code that you will have and this can change on a yearly basis depending on the Governments Budget on Tax Free Allowances.
A Tax Free allowance is the amount you can earn (any income from any source) in any one tax year before you pay any income tax!!
A Tax year runs from 6th April -5Th April of the following year. This is why we refer to tax years in the following format: 2006-07, 2007-08, 2008-09, 2009-10 etc.
This tax year (2009-10) the Tax Free Allowance is £6,475.00 which equates to a tax code of 647. If you’re aged 65-74 Tax Free Allowance is £9,490.00= tax code 949.This means you can earn £6475.00 this year before you have to pay tax and if your 65-74 it is £9490.00 before you pay tax.
Understanding the letter that comes after your tax code is a little trickier, but don’t give up on me yet!
L For those eligible for the basic Personal Allowance - 647L for the 2009-10 tax year. (This is most of us) It is also used for 'emergency' tax codes (I will cover this later).
P For people aged 65 to 74 and eligible for the full Personal Allowance
Y For people aged 75 or over and eligible for the full Personal Allowance
T Is if your tax code is under review
K When your total allowances are less than your total ‘deductions’ (I will cover this later).
BR is a Tax Code that doesn’t come after any numbers and being on this code is where a lot of income tax problems occur! Lots of companies that can’t be bothered getting the correct information off you often dump you on this code. Especially, if it is s short term contract you are on. If you’re a student WATCH OUT! Most short term casual employees are put on this code as it is wrongly assumed you have used your allowances up on another job elsewhere!