Tax codes explained
For many nannies, tax codes are a daunting subject that they know little or nothing about (and quite frankly probably prefer not to). However, your tax code can really affect the amount of take home pay that you get and if HMRC make a mistake it can be very costly for you, so it is really worth trying to understand what a tax code means so that you can keep an eye on yours.
Tax codes are used to calculate how much tax a person should pay.
They are based on the amount of income that a person earns, as well as any allowances or deductions that may be applicable.
A tax code is usually made up of several parts, which indicate the Income Tax rate and whether your tax allowance can be updated at the turn of the tax year automatically. The first part of the code is usually a number, which indicates the amount of pay you can earn that year free of Income Tax. This is followed by a letter which indicates whether your tax allowance can be uplifted at the turn of the tax year automatically. For example, the standard tax code for the 2023/24 tax year is 1257L. This means that you will be taxed at the basic rate of 20%, with a personal allowance of £12,570 and at the turn of the tax year this can be increased in line with the new years tax allowance (if it has changed).
You can find out what your tax code is by looking at your payslip, or by contacting HMRC.
T or L
A tax code is usually represented by some numbers with a T or L on the end. The T or L are actually irrelevant to you really but what they reflect is whether a payroll bureau should uplift your tax code automatically at the end of the tax year (if HMRC have changed the tax allowance for the new tax year).
If your tax allowance has an L on the end then we are allowed to automatically update your tax allowancwe with whatever the HMRC increase in tax allowance is.
If your tax code has a T on the end then we have to keep you on the old tax code until we received a notification from HMRC that changes this for you.
If you have two jobs and have split the tax allowance between them, then you would expect one to have an L and one to have a T on the end to ensure that you only recieve the uplift in tax allowance once.
It is the numbers that are important
The easiest way to understand you tax code is to simply add a zero to the end of it, so 1257 becomes 12570. Then you turn this into money so 12570 becomes £12,570. So this tax code of 1257 means that you can earn £12,570 in a year without paying any tax at all. However, it is divided up over the year, so you get £12,570 / 12 = £1047.50 per month that you do not have to pay any tax on.
Sometimes your tax allowance may be split between two employers and so one employer could have a tax code of 628 and the other have a tax code of 629. This would be the same as having one employer have 1257 (as they add up to the same amount 628 + 629 = 1257). Likewise if you had one employer on 700 and another on 557, this would still be the same as having one employer on 1257.
Basically once you have established what your monthly allowance is before you pay tax then you simply deduct 20% from the rest of your gross salary (so long as your gross salary is under £50,270 in the 2022/2023 tax year) unless you live in Scotland where different tax rates apply.
What if there are no numbers
If you have two jobs then you will either have your tax allowance shared between them both or you may have one employer who has all of it, if this is the case, the second employer will likely be on a BR tax code, this is fine, it just means they do not get any of your tax allowance and must deduct 20% tax from your total gross salary.
What about an S at the beginning
If you have an S at the beginning of your tax code this simply means that you are a scottish citizen and different tax rates apply to income over £12,570.
What problems might come up
If, for example, you had two employers and they both had the tax code 1257L on your payslips, this means that you are getting a total of £25,140 tax free and this will result in a huge underpayment with HMRC, for which they will contact you to arrange repayment.
What do I do if I think there is something wrong
If you think that there is something wrong with your tax codes then call HMRC on 0300 200 3300 as they will be able to look at your tax codes for you (you will need to give them your NI number) and if there is a mistake they can correct it.
They can also tell you which codes your employers should be on and if they are not using the code that HMRC says they should be then you can ask HMRC to send them a new one so that it gets updated as soon as possible.