Tax codes are assigned to aid in tax deductions by HMRC and can easily be found on your payslip. Through this blog post, we will analyse the reasons and implications of being assigned the 1125N tax code. We will also discuss some key concepts including basic rate tax, personal allowance, tax codes and their calculation. 

Why Is My Tax Code 1125N?

If your tax code is 1125N, 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.

It is common among spouses and partners to benefit from the Marriage Allowance under which the partner/spouse who earns less than the Personal Allowance amount of £12,750, transfers 10 per cent of this amount to their high earning partner to increase their Personal Allowance or tax-free earnings. In this way, while the higher earner will pay a higher amount of tax while the couple will collectively pay a lesser amount of tax.  

Couples who aim to benefit from this allowance will be able to save between £353 and £912.50 during the 2021-22 tax term.

To be able to transfer some of your Personal Allowance to your spouse/partner, it is essential that they pay the basic rate of tax, their income is between £12,571 and £50,270 and you have not used all of your tax-free income.

When your tax code changes to 1125N, your partner’s tax code would have changed to 1375M, which depicts that they have benefitted from the Marriage Allowance through the transfer of tax-free income from you.

Your Marriage Allowance is applicable even in cases where both partners are on pension or they are not living in the UK but claiming Personal Allowance. If one of the partners dies or the couple separates/gets a divorce, they will be able to use this allowance for the remainder of the tax term.

Generally speaking, 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

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.

What Is Personal Allowance?

When you are working in the UK, there is a certain amount of your income that remains tax-free as it is considered to be a Personal Allowance. The amount set for Personal Allowance during the 2021-2022 tax period is £12,750. 

Your personal allowance is applicable on your combined incomes from different sources. However, for the purpose of tax deduction, your main or primary job, which is also the source of a higher income is considered for Personal Allowance deduction prior to a tax rate is applied.

Since you get Personal Allowance once (it does not apply to each individual source of income), it may be in your own interest to have it applied to your main job and not the second one. However, if someone works two jobs and their cumulative income is less than the Personal Allowance amount of £12,750, they can have it spilt across both incomes. Sometimes a second job may increase your tax bracket which leads to a higher tax deduction on your income with an insignificant impact on your take-home salary.

Your second job is usually considered to be the one that provides a lower income than the first one and there is no consideration for Personal Allowance since it has already been accounted for. The reason is that the HMRC divides your total income by sources to calculate the amount of tax that is due on your cumulative income.

Do I Have To Pay Tax On Income From A Second Job?

Yes, if you have a second job, your income from this source of earnings will also be taxed. However, the tax that you pay on a second job will depend on a number of factors. 

Generally speaking, your second job is usually assigned a BR (Basic Rate) tax code which indicates that there is a 20 per cent tax due on your income.  

To avoid being overtaxed or undertaxed (with tax arrears due at the end of the term) due to a second job, it is advisable to follow the below instructions: 

  • When you start a second job you must make sure that you get a Starter For or P46 from your new employer. This form is used to update your employment details at the HMRC.
  • Confirm the tax codes assigned to both of your jobs. Your main job is usually assigned a 125L tax code for 2021-2022; while your second job will be assigned a BR, D0 or D1 tax code.

If your second job involves you in a self-employed position, you will have to pay your own tax and National Insurance contributions by filing a self-assessment tax return on the 31st of January every year. 

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.

Conclusion:

The 1125N and its corresponding 1375M tax codes are assigned to married couples or partners who are benefitting from the Marriage Allowance through the transfer of tax-free allowance from the partner with a lower income to the one on a higher one. In this manner, they are able to save on collectively paid taxes. If you have been assigned the 1125N tax code it means that you have applied to transfer a portion of your Personal Allowance to your partner.

FAQs: Why Is My Tax Code 1125N?

Why has my tax code decreased?

Your tax code may have decreased to increase the taxable amount on your income. The reasons may be tax arrears that you need to pay, an increase in income which will increase your tax or that you have received taxable benefits such as a company car. 

Is a lower K tax code better?

Yes, a lower K tax code is better as the number indicates the amount of tax to be deducted from your income. K codes are assigned to individuals to indicate an additional amount of taxable income to their earnings.

Why has my tax code changed this month?

Your tax code may have changed due to a change in your earnings through income or pension.

 It may also change if you have started a new job, started to work from home or started benefitting from the Marriage Allowance.

How much tax do I have to pay in the UK?

Tax bands in the UK are classified as follows:

  • 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

Do HMRC automatically refund overpaid tax?

HMRC refunds overpaid tax; sometimes automatically and sometimes through the refund application process initiated by the claimant.

References:

Tax-codes

Does-the-marriage-allowance-apply-to-you/

Tax-codes-made-easy/1131n

Marriage-allowance

What Is A BR Tax Code? | BR Emergency Code.

Second job tax – how much will I have to pay? | reed.co.uk

How are bonuses taxed in the UK? | Cash and non-cash bonuses

What your tax code means – GOV.UK

Tax codes – GOV.UK

HM Revenue & Customs – GOV.UK

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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.