Understanding Tax Codes
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.
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. For example, when we went from the 2018/2019 tax code of 1185L to the 2019/2020 tax code of 1250L, if you had an L on the end your tax code will have been changed by us automatically. If your tax code had a T on the end then we would have kept you on the old tax code until we received a notification from HMRC that we were allowed to change this for you.
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 1250 becomes 12500. Then you turn this into money so 12500 becomes £12,500. So this tax code of 1250 means that you can earn £12,500 in a year without paying any tax at all. However, it is divided up over the year, so you get £12,500 / 12 = £1041.66 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 625 and the other have a tax code of 625. This would be the same as having one employer have 1250 (as they add up to the same amount 625 + 625 = 1250). Likewise if you had one employer on 700 and another on 550, this would still be the same as having one employer on 1250.
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 £50,000 in the 2020/2021 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 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 £12,500.
What problems might come up
If, for example, you had two employers and they both had the tax code 1250L on your payslips, this means that you are getting a total of £25,000 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. Also, they can 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.