Do you know your letters?

Oct 9, 2014 | TC blog

When you check your tax code, look out for different letters.

If your code has M1 or W1 after it, this means that your previous coding has been incorrect, or if you’ve changed jobs your new employer doesn’t have details of your past employment history. You should always pass on your P45 to your new employer to make sure you’re paying the correct amount of tax.

M1 or W1 coding doesn’t take into consideration what has gone on before in that tax year. If your previous coding was incorrect and you underpaid tax, rather than collect all unpaid tax from one month’s salary, HMRC ignore the past and tax you as if it is the first month of the tax year. This can mean that tax underpaid because of an earlier wrong code is not collected during the year. The underpaid tax will normally be collected via your tax code in one of the following two tax years. If you have overpaid tax due to an incorrect coding, HMRC would normally pay this to you immediately in one payment.

Look out for special letters.

“K”

If you have taxable benefits in excess of your personal allowances in the year, for example personal allowances of £10,000, with benefits of £12,000 from an expensive high CO2 car you will have a “minus allowance” of £2,000. Minus allowances are represented by K codes, so in this case the code would be K200.

Although K codes are designed to collect extra tax, the amount of tax collected each pay period cannot be more than half of the earnings for that period.

“BR”

A BR code means that no personal allowances are available against this source of income. This generally happens when a person has two sources of income and one source is allocated all of the personal allowances and the other is taxed at basic rate, currently 20%.

“DO”

The DO code is similar to a BR code, except the earnings from this source of income will be taxed at the higher rate of tax, currently 40%. This is where HMRC expect other sources of income to exceed the basic rate threshold (£41, 866 for 2014 / 2015).

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