Everything you need to know about tax codes
When you pay a part of you earned money as tax, you should be sure that you are paying the right amount. Most of the people are sure that they are paying the correct amount to the government. There few people who thoroughly calculate the amount of tax they have to pay. For this purpose, tax code is required. If you understand the tax code, you can know the actual amount of payable tax.
The tax codes are assigned codes and you need to have complete understanding of these codes for tax calculation. HMRC issue these codes to your employer. These codes consist of numbers and letters. Your employer uses these codes to determine the correct amount of income tax that he would deduct from your salary. Some of these codes look like 434L, 323P, 456V, K345, DO, NT, and OT.
These numbers are representatives of the tax allowance or the amount of money that your employer will deduct from your salary. They derive the tax allowance through the following formula:
Tax allowance = Number X 10 + 9
For example, an employee is entitled to a tax allowance of 4,349 if his tax code is 434L. It means that this amount will be deducted from your annual income. Thus, a person with annual income of 30,000 will be paying tax on 25,652.
Different people pay different amount of tax on certain income level. The reason is that they fall into different categories.
These categories are indicated by the letters. Some of them are explained bellow.
L – This letter indicates the basic personal allowance and that is the most common tax code.
P – People of age between 65 and 74 are eligible for full personal allowance. They fall in this code
Y- This code is for people who are eligible of full personal allowance and are above 75 years of age.