This blog post aims to explore the meaning of the tax code 950L. For this purpose, we will explore how and why the 950L tax code is applied to individuals and whether or not you can expect it to run through the entire tax term or if will it be changed at any given time. We will also briefly explore the calculation of this code as well as review in general how tax codes are assigned.

What Is The Meaning Of The Tax Code 950L?

The meaning of a 950L tax code is that the person to whom it is assigned has a basic personal allowance of £12,500 which is exempt from a tax deduction. On top of that, they have a fringe benefit such as a company car provided by their employer which is valued at £3,000 and is being taken into account for tax calculation purposes. 

In this case, the Personal Allowance of £12,500 is applied at the Basic Rate and is being used in the calculation to subtract the cash equivalent value of the company car at the rate of £3,000. 

It can simply be calculated as follows:

Personal Allowance – Value of Company Car = Taxable Income

£12,500 £3,000 £9,500

The remainder of £9,500 determines the number element of the code which is 950 in this case (after removing the last digit from the remaining amount).

The letter “L” at the end of the tax code indicates that the basic rate of Personal Allowance is assigned to your tax code.

The 950L tax code applies to salaried individuals who are paying their taxes under the PAYE system; where employers deduct the applicable amount of taxes and National Insurance contributions and process them onwards to be duly paid to the HMRC.

The Personal Allowance amount of £12,500 was applied during the 2019-2020 tax term with all taxpayers being assigned this amount to their annual income as a deduction. The remaining amount of income was then taxed according to the assigned tax codes.

The Personal Allowance amount has changed from £12,500 in 2019-2020 to £12,570 in 2022-2023. Therefore, any recent calculations that will be done for the implication of tax on your income will be based on the current Personal Allowance amount.

How Is Tax Applied To A Company Car Under The 950L Tax Code?

When car tax is applied to a company car, the factors that are taken into consideration are its CO2 emissions, price and year of manufacture. Therefore, if your company car is not highly-priced or has a low P11D value and has low CO2 emissions, you can reduce your car tax bill. Similarly, if you drive a hybrid or electric car, you may have to pay little to no car tax.

When your employer calculates your income tax deductions under the PAYE system, the value of your company car is added to your salary before taxes may be calculated. This means that your Personal Allowance will first be deducted before taxes are applied. Depending on whether your income tax band is 20%, 40% or 45%, you will pay HMRC based on the rate of income tax you pay. 

Being a Benefit in Kind (like accommodation, mileage allowance, subscriptions to professional bodies), a company car is also a taxable non-cash benefit enjoyed by many employees. When tax is calculated on a company car, its taxable value is taken into consideration. This can be done in either of the following two ways:

  • Calculate the cash equivalent of the benefit and add it to the salary of the employee. Then tax the amount through payroll. 
  • Use a P11D form to declare the car’s value versus the taxes paid to date.

Is 950L A Cumulative Or Non-Cumulative Tax Code?

The 950L tax code can be cumulative if it is being applied to an entire tax year and will be non-cumulative if it is being applied to a certain portion of the tax term. Its application will primarily depend on whether the benefit such as a company car was assigned to an employee during the entire tax term or during its tenure.

A cumulative tax code has been calculated based on your year-to-date tax payments. This means that the cumulative tax code takes into account your tax payments made during a tax year while keeping an account of the amount of tax-free allowance that you have used during the same time.

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.

Since the 950L tax code does not end in any of these extensions, it can be safely termed as a cumulative tax code.

How Are Tax Codes Assigned?

Tax codes are assigned based on your income, the applicable rate of deduction and your Personal Allowance. They are a combination of letters and numbers that determine the amount of income tax due on an individual. 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.

You can check your income tax and assigned tax codes by using your Government Gateway user details.

Conclusion:

The discussion in this article helps to conclude that the 950L tax code is applied to a Personal Allowance of £12,500 and takes into account the value of a company-provided fringe benefit such as a company car. In this case, the value of the company car is set at £3,000 which determines the numeric value of the 950L tax code when you subtract the value of the company car from an employee’s Personal Allowance amount.

References:

PAYE and Income Tax: In-depth | Croner-i)

Are you the one in four who could be paying the wrong tax? | Thomson Cooper | Accountants Edinburgh & Dunfermline, Fife

Understand your tax code – Which?

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