HMRC’s tax codes determines the amount of tax you pay on your salary. This tax is known as PAYE (Pay As You Earn) and the different brackets, arranged by certain criteria such as how much you earn and your age, are identified by a code letter.
The system makes paying PAYE tax easier by deducting it before an employee receives it, with the employer paying the combined total of a firm’s staff taxes directly to HMRC. This negates the need for individuals to work out how much tax they owe and pay it themselves, unlike self-employed people.
However, if you are assigned the wrong tax code then you could be paying the wrong amount of tax. This is important because if you are underpaying, then you probably have to pay it back once HMRC figures it out. Likewise, if you are overpaying then you should receive a rebate.
This is why you need to understand what the tax codes mean, or at least what the tax code you have been assigned means. We won’t cover all the codes here, but we will explain the one code that causes confusion because many people don’t understand what it actually means.
So, let’s talk about the X tax code.
What the X Tax Code means
The X tax code is an emergency tax code, similar to BR (Basic Rate), W1 (Week) and M1 (Month) tax codes.
If you have been assigned the tax code BR, W1 or M1, this means HMRC doesn’t yet know exactly which proper tax code you should be assigned so they have assigned you one that either puts you on the basic rate until they figure it out, or makes you pay taxes as if you are earning for the first time (thus the codes that indicate Week 1 or Month 1). HMRC simplifies this by simply assigning an X meaning “unknown tax code”. The reasons why you might be assigned an emergency tax code include:
You have changed job, but haven’t received your P45 from your old employer
You have become employed after being self-employed
You are starting your first job
You are receiving company benefits (e.g. company car)
You are receiving the state pension
How to find your tax code
Finding your tax code is easy as it appears on several important documents that we all receive fairly regularly. If you cannot get hold of any of the documents listed below, then you can also contact HMRC by creating an account on its website, or by signing in there using your Government Gateway or Gov.uk Verify ID if you have one.
Here’s the list of the most common places where you can find your tax code.
Pension Advice Slip
Every time you get paid by your employer, you should receive a payslip with your tax code on it, usually by your National Insurance number.
The PAYE coding notice, often shortened to P2, is sent out just before the new tax year begins, which runs from 6 April to 5 April, so expect it to arrive in March.
When you stop working for an employer, they will give you a P45 slip that you are supposed to give to your next employer so your previous tax payments can be connected.
The P60 slip is given to every employee by their employer once a year and is an annual summary of your salary and the tax you have paid on it.
Pension Advice Slip
Anyone receiving a private or workplace pension should be able to find their tax code on the pension advice slips they receive.
How to change tax code
Once you have been assigned a proper tax code instead of an emergency one like X or BR, the onus is on you to assess whether the tax code you have been assigned is the correct one for your earnings, age and situation. You can research the numerous tax codes and their meanings on HMRC’s website.
If you are overpaying tax then you will probably want to sort it out pretty quickly. You can sign in to the HMRC website on the Government Gateway, but it may be quicker and easier to call HMRC on 0300 200 3300 and speak to someone directly. Simply tell them you think your tax code is wrong and they will start to investigate.
If you are underpaying tax, then you must understand HMRC puts all the responsibility on you. You will probably have to repay the unpaid tax, but sometimes it won’t be necessary. For example, HMRC will only check the last four years’ worth of taxes for unsuspicious behaviour. However, this extends to six years if they suspect you have acted recklessly, and 20 years if they suspect you have acted deliberately.
So even if you think you are underpaying tax due to an incorrect tax code, it is better to contact HMRC and sort it quickly.
We Can Help
If you’re interested in discovering more about tax code and how to change them, or any other aspect of business taxation, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.