Paying Her Majesty: Understand your tax codes and how taxes are collected

Most people feel as though if they are an employee then their tax bill has already been taken care of, but that is not always the case. There are people who have several employments and they do get confused about their tax code. For example, we’ve worked with medical professionals, and when a trainee doctor is working on rotation basis, he/she may have several employers in a year, so the tax code might not all be correct. Some of the HR departments do provide people with the wrong tax codes so individuals will end up having underpaid or overpaid tax.

Tax Codes

1150L – The most common tax code for the current year is 1150L. For 17/18, your tax-free allowance is £11,500, this is where the code comes from, the tax code is calculated by dividing the allowance by 10. The letter L at the end means you will always have a tax-free allowance available which can also be referred to as ‘Personal Allowance’. This tax code is a normal tax code and it can be found on your payslips or documents.

1100L – In 16/17, the normal tax code was 1100L which can mainly be found on your P60. Last year’s personal allowance was £11,000. Each year the code is different and the personal allowance may change so you need to be aware of that to prevent any confusion.

Tax codes beginning with ‘K’ – This tax code means you do not have the full personal allowance. Normally, HMRC will send a letter explaining why your tax code is like this and you will have a detailed calculation. If you have underpaid tax from a previous year you may have this tax code because it saves you time from having to fill in a tax return. In some cases, if your underpaid tax is more than £3,000 you can pay an amount upfront and the rest can be collected via tax code.

BR – Another tax code is BR which stands for ‘Basic Rate’. Normally, it is used for people that have a second job and they pay tax at basic rate tax bracket. Everything they earn will be deducted by 20% because 20% is the basic rate. For example, if you earn £1,000 you will need to pay £200 tax.

D0 – This tax code applies to people that have more than one job here they earn a higher rate. This means that you fall within the 40% tax bracket.

D1 – This applies when an individual has more than one job and where all income are taxed at 45% becomes appropriate.

NT – This particular tax code means no tax is being deducted. This is quite rare but if you are not a UK resident and you do not subject to UK tax then you do not have to pay tax.

0T – This tax code usually applies to people that have zero tax-free allowance. Usually, if you are earning over £100,00 for every extra £2 you earn above £100,000, you lose £1 of personal allowance. In 17/18, you will lose your personal allowance completely if your salary is over £123,000.

Second Payment on Account

If less than 20% of your tax is paid by tax code then you might have to pay tax twice a year. This is called, ‘Second Payment on Account’. From tax year 16-17, the dividend tax changed so for some director only companies or contractors who have taken dividends may have a second payment on account.

In regard to this, it is advised to do your tax return as early as possible just to make sure you have some funds to prepare as you are required to pay half of next year’s tax bill upfront. It is important to take note that the deadline for 16/17 self-assessment is 31st January 2018 and the deadline for the second payment on account for 16/17 is 31st July 2018.

If you feel as though next year your situation is going to change and you do not think you will have a tax bill which means you will have nil then you can claim reduction on second payment on account.

Running as a Limited Company? When to Pay Company tax

A company is a separate entity, separate from yourself, so on itself it has its own deadline and its own financial year. It depends on when the company was registered. Normally, the financial year is 12 calendar months but it is not the usual calendar months. For example, if the company started in 1st April 2016 then your financial year ended 31st March 2017. Corporation tax which is the company’s self-assessment needs to be paid 9 months and 1 day after your financial year ends.

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