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Tax codes: are you using the right one?

We all know that paying the right amount of tax is important. Nobody wants to lose money by paying too much tax, and most people would not want to take the risk of paying too little. They know that the taxman will eventually catch up and fine them heavily.

The key to making sure you pay the right amount lies in your tax code. It is this combination of numbers and letters that governs how much tax is deducted and paid. If your tax code is right, the amount you pay will likewise be correct.

Understanding these codes will allow you to make sure that you have been assigned the right one. Tax codes are broken down into two parts; the first three figures denote how much you can earn before having to pay tax. You just have to multiply this number by three to determine your tax free allowance.

The letters in the codes denote the type of taxpayer you are. Most people are rated as L, but the letter used depends, in part, on when the taxpayer was born and the type of income that is being taxed. If you have more than one source of income you may have two tax codes and one of them will be BR, D0 or D1. One income may be taxed at one rate, and the other at a higher rate.

Some people take an income in the UK, but reside in other countries. They may pay their income tax to the government of the country in which they reside instead of the UK. That tax code is NT.

Tax bands and allowances change on an annual basis, so you should check your tax code each year. It is also wise to look at the tax code on your wage slip when you start a new job. If you are in any doubt, you need to contact HMRC to have your tax code checked.

Posted by Mark
October 6, 2014
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