Why Correcting Your Tax Code Is So Important
Your tax code directly impacts the amount of tax taken from your earnings, and it’s based on HMRC’s understanding of your personal situation. If this isn’t kept up to date, you might be paying too much – or too little – tax. While underpaying sounds appealing, it can lead to large, unexpected bills down the line. Overpaying, on the other hand, means you’re losing money that could otherwise go toward savings, debt reduction, or personal financial goals.
Correcting an incorrect tax code can often free up extra cash within weeks of contacting HMRC, making this a relatively quick win compared to other financial adjustments. Ensuring your tax code is accurate is one of the simplest and most impactful ways to improve your overall financial health.
The Common Culprits Behind Incorrect Tax Codes
Tax codes can be incorrect for a variety of reasons. Here are some of the most common ones:
- Changing Jobs or Multiple Jobs: If you've started a new role or held multiple jobs during the year, your employer might be operating on an emergency tax code until HMRC updates their records.
- Receiving Benefits in Kind: Perks like a company car or private healthcare impact your taxable income, potentially leading to discrepancies if they aren’t accurately reflected in your tax code.
- Marriage Allowance: If you or your spouse are eligible for Marriage Allowance, but your tax code doesn’t account for this, you could be missing out on tax savings.
- Pension Deductions: Starting, stopping, or adjusting pension contributions can impact your tax code, especially if you're making use of salary sacrifice or other tax-efficient pension schemes.
By understanding what factors could influence your tax code, you are more empowered to catch any discrepancies early. Make sure to cross-reference what you’re seeing on your payslip against recent financial changes in your life. If you're unsure how to break down the details, check out our guide on how to understand your payslip.
How to Review Your Tax Code
Once you know what to look out for, it’s time to review your tax code. You’ll find your tax code on your most recent payslip, and you can also check it on your personal tax account via the HMRC website.
Your tax code will usually be a combination of numbers and letters – for example, 1257L. Each tax code represents your personal allowance (the amount of income you can earn untaxed) and any additional circumstances, such as receiving any benefits or having extra allowances.
What does it mean?
- Numbers: The numbers in your tax code represent your available tax-free earnings. For example, "1257" means you can earn £12,570 a year before paying any income tax.
- Letters: The letter often indicates specific circumstances, such as an L for basic tax allowances, or BR for basic rate tax applied to all your income (often seen with second jobs).
If these numbers don’t add up given your current situation (be it due to recent salary changes, benefits, or other personal factors), you’ll need to take steps to correct it.
Updating Your Tax Code with HMRC
Think your tax code is wrong? Don’t panic. HMRC allows you to easily report any discrepancies or changes. When you contact them, make sure to have all your necessary documentation, including any recent payslips, P60s, and financial records. You can do this online by using your personal tax account or via a phone call.
After adjusting your tax code, HMRC typically informs your employer automatically, and the changes should show up in your next payslip. For most people, this will mean a refund in their incoming salary, or reduced tax going forward.
If you've overpaid tax in the past, you can claim a refund for up to four years, giving you a nice little windfall to put toward bigger goals. Consider using any refunded money wisely – for example, by automating your savings or tackling high-interest debt.
Staying Proactive: Check for Changes Regularly
It’s crucial to review your tax code at least once a year to verify it's still accurate – especially after major life changes such as marriage, starting or stopping a benefit, or a new job. By staying proactive, you can avoid overcharging issues and the financial burden of being taxed at the wrong rate for months on end.
You should also keep an eye on government policy changes that could affect your tax situation. Tax rates, personal allowances, and other thresholds are often updated during budget announcements. Ensure your tax code reflects any new legislation by reviewing it promptly after these updates. You can read our guide on how to [stay ahead of tax changes](https://www.wealthfare.co.uk/post/stay
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