Unless your income falls under the classification of exempted earnings or are below the Personal Allowance threshold, all income is taxable. The aim of this blog post is to explain the nature, use and application of a tax notification letter with regards to tax codes assigned to individuals. We will also learn about how tax codes are calculated and assigned to taxpayers in the UK, as well the meaning of some of the commonly used tax codes.

What Is A Tax Notification Letter?

A tax notification letter is a notice from the HMRC to inform taxpayers of the tax code that is being assigned to them. This can be issued when your income level reaches above the Personal Allowance amount of £12,750, there is a change in your income level due to an increase or decrease in wages or there is a change in your employment status between being employed and self-employed.

For instance, if you are assigned the 1125N tax code, it means that you have taken advantage of the Marriage Allowance by transferring the maximum amount of £1,250 from your Personal Allowance to your partner to increase their tax-free income. This tax code is assigned on the basis of an application for Marriage Allowance requested by a taxpayer.

If your tax code is 0T1, it means that you have no tax free personal allowance and a basic rate of income tax will be applied to the total amount of your income. There are many reasons why an 0T1 tax code with M or W extensions are assigned to individuals. One of the reasons may be that you have no tax free allowance remaining which may be exempted from income tax. Another reason could be that you’ve recently started a new job. Due to this, you have not been able to give your employer your old P45 and you haven’t submitted your P46 as yet. 

The 1282L tax code indicates that you have been granted a tax relief by HMRC due to the work from home nature of your employment since the onset of the pandemic. The reason for this tax relief is to help individuals adjust the increased expenses that they would have incurred as a result of increased heating, internet usage and electricity bills while working from home. However, this relief applies only to individuals who have been asked by their employers to work from home and have not personally chosen to do so.

If there is a T that appears at the end of your tax code it means that your taxed amount needs a review from the Inspector of Taxes. The 500T tax code equates to the standard personal allowance of £9,440 during the 2013-15 tax term. This also means that a previous tax code was reduced from the normal (1150) to 500. The reason for the is change may be explained in the tax code notification received by the claimant.

The 1250LX tax code on your payslip means that the HMRC is directing your employer to consider your tax deduction as a non-cumulative one. This means that the tax rate applied on your income is only applicable for the period in consideration and the same rate may not be applied for the entire tax year.

When you receive the tax notification letter, you must make sure that the tax code assigned to you corresponds to your payslip as well as your current circumstances. You must also check whether all allowances, incomes, pensions, restrictions and adjustments are mentioned correctly. 

If you find an error in your tax notification letter, you must inform your employer or HMRC.

What Are Tax Codes?

Tax codes are a combination of letters and numbers that determine the amount of income tax due on an individual. While the letters indicate your financial position and how it relates to your personal allowance, the numbers tell your employer pr pension provider the amount of tax-free income that you are eligible for in that tax year. 

For instance, 1257L (currently the most common 2021-22 tax code in the UK) refers to the new Personal Allowance rate for 2021-22, which is £12,570 and the letter “L” indicates that the individual is entitled to this amount of tax-free income. Any taxes that are to be charged will be above additional amounts beyond this figure.

To confirm your tax code, you can check any of the below-listed documents:

  • Payslip
  • P45 form
  • P60
  • PAYE coding notice
  • Pension advice slip
  • HMRC website

How Are Tax Codes Assigned?

Tax codes are a combination of letters and numbers that determine the amount of income tax due on an individual. While the letters indicate your financial position and how it relates to your personal allowance, the numbers tell your employer or pension provider the amount of tax-free income that you are eligible for in that tax year. 

The following steps are followed by the authorities while assigning tax codes:

  • Step 1: Your tax allowances are calculated. In most cases, this is an individual’s personal allowance added to any other allowances and job expenses.
  • Step 2: Your deductions are calculated. These are incomes for which tax has not been paid and may include any part-time work or certain state benefits.
  • Step 3: The deductions are subtracted from the tax allowances. The result is your pre-tax income. If this amount equals personal allowance, your income remains tax-free.

How Are Tax Identification Numbers Used In The UK?

Tax identification numbers are used to track and monitor the tax accounts of individuals. Although the term TIN Number is not specifically used in the UK in its strictest sense, the HMRC issues two TIN-like numbers to members of the public. The purpose and use of these are described below:

  • The Unique Tax Payer Reference (UTR): This is a ten-digit set of numbers issued by the HMRC to individuals and businesses who qualify for paying tax returns in the UK. You will find this number on the front page of the tax return (form SA100 or CT600). In addition to this, you will find it on a “Notice to complete Tax Return” (form SA316 or CT603) or a Statement of Account. It is also printed next to the headings of “Tax Reference”, “UTR” or “Official Use”; but the appearance and terms that are used will depend on the type of document issued. 
  • The National Insurance Number (NINO): This includes two letters which are followed by six numbers and then only one of the letters between A, B, C and D. Individuals residing in the UK will be issued a NINO once they are 16 years of age. They will be informed by the Department for Work and Pensions (DWP) or the HMRC. If you are an employee, you will find this number on your payslip as well as on a Statement of Account issued by HMRC. It links individuals to their records of national insurance contributions, tax payments, student loans as well as social security benefits.

How Much Income Tax Do I Have To Pay?

Incomes above the minimum cap are taxed at an incremental rate of 20 per cent to 45 per cent depending on whether an individual belongs to the basic, higher or additional tax rate band. Below are details of these bands:

  • 0 per cent income tax when income is up to £12,570
  • 20 per cent income tax when income is between £12,571 and £50,270 
  • 40 per cent income tax when income is between £50,271 and £150,000 
  • 45 per cent income tax when income is above £150,001

If you are self-employed, you are required to file a self-employed tax return to pay your taxes through a self-assessment. 

What Is A Non Cumulative Tax Code?

A non-cumulative tax code is one that only takes into account the period in question for your tax calculation and deduction. This means that depending on whether you receive your pay on a weekly or monthly basis, a non-cumulative tax code will apply for that specific period only and it may change the next time you receive a payslip. In the case of weekly pay, you will find a W1 extension at the end of your tax code; while for a monthly salary your tax code will end with an M1 extension.

This means that the income tax rate is applied to the entire sum of income(s) of an individual without the deduction of Personal Allowance from their earnings. In case an individual has paid a sum of income tax before a non-cumulative tax code is applied to their income, the amount cannot be adjusted. Therefore, there are chances that taxpayers will end up overpaying their taxes when a non-cumulative tax code is assigned to them in the middle of a tax term.

However, this overpaid amount is recoverable by contacting the HMRC and updating your employment information with them.

What Is The Basic Rate Tax Code?

The basic rate tax code is BRX. It is an emergency tax code that indicates that all your incomes must be taxed at the basic rate of 20 per cent without taking into consideration your tax-free Personal Allowance. 

It is usually applied when the HMRC and your employer do not have complete details regarding your employment and/or income details and the BRX tax code is assigned to you while the documentation is complete and a permanent tax code can be assigned to you.

In addition to this, you can be assigned a BRX tax code if:

  • an individual has not provided their employer with a complete P45 form or a P47
  • someone is being transferred from being self-employed to a PAYE employee
  • you are receiving an additional income through a second job or a pension

If you think you’ve been assigned a BRX tax code by mistake you should provide the required documents and details to your employer or HMRC so that a correct tax code can be assigned to you. If you fail to do so, you may end up overpaying your taxes.

On the other hand, it is likely that you are a high taxpayer you should be assigned a D0 tax code and you are underpaying your taxes with a BRX tax code. If you do not correct this error, you may have to pay the due amount of taxes in lump sum amount once the error is realised by your employer or HMRC and a correct tax code is assigned.

Conclusion:

A tax notification letter is sent by HMRC to inform taxpayers of the their tax code so that they may be aware of the amount of tax that they can expect to be deducted from their income. This is based on the calculation of an individual’s taxable income and the tax code applied on their income. This tax code may be chane due to a change in your circumstances, in come level or employment status.

FAQs: What Is A Tax Notification Letter?

What is a tax notice?

A tax notice indicates your tax code as per the data provided to HMRC. This tax code forms the basis of the amount to of tax to be dedcuted from your taxable income. 

How do I get a copy of my tax code notice?

To get a copy of your tax notice, you can either contact the HMRC or check online through your Personal Tax Account.

How do I know if I am on the right tax code?

You can check your tax code by looking at your payslip. If you think that you’ve been assigned an incorrect tax code you must inform your employer or HMRC.

What is the standard tax code?

The standard tax code for 2022-23 is 1257L; which gives taxpayers personal allwoance of £12,750.

How do I check if my tax code is wrong?

If the tax code indicated on your payslip or tax notice is incorrect, you can contact the HMRC through the Income Tax Helpline at 0300 200 3300 or via the HMRC contact us page.

References: 

Income tax calculator: Find out your take-home pay – MSE

Estimate your Income Tax for the current year – GOV.UK

Tax-free bonus to employees in the UK – What you need to know

Income tax calculator 2022-23, 2021-22 and 2020-21

UK Tax Calculators

HM Revenue & Customs – GOV.UK

Income Tax – GOV.UK

What was missing from this post which could have made it better?

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.