Tax Rebates & Refunds

How does the UK tax code system work?

January 14, 2011
Posted in Income Tax — Written by Jennifer

There are many people who are confused about the different tax codes in the UK and how they affect their pay. Although it looks difficult, understanding the working of the UK tax code is quite easy.

The HMRC issues the company with a tax code to ensure that an appropriate amount of income tax (PAYE) is deducted from your salary every month.

Some examples of tax codes include:

• 475V, 474P, 382Y
• 474L
• OT, DO, BR, NT
• K384
• 384T

Except the OT, DO, BR, NT, other tax codes have a combination of letters and numbers. The letters determine the income that is to be taxed, whereas the numbers verify the amount of income tax to be collected.

The meaning of letters in your tax code

Tax codes Y, V and P –
These indicate the higher personal allowances for individuals over 65 years of age.

Tax code L
This is the most common code that indicates the basic personal allowance.

Tax code K
This signifies that the amount of allowance is less than your complete deductions. For instance, if you have private medical benefit, a company car or other taxable benefits or expenses, they will be indicated with the K tax code.

Tax code T
This indicates that there are items that need to be reviewed by the Inspector of Taxes.

Tax code BR
The BR or Basic Rate tax code specifies that your entire income is subjected to the basic tax rate.

Tax code OT
Under this your entire income is subjected to higher and basic tax rates with no personal allowance.

The tax code DO indicates that your income is subjected to higher tax rates and tax code NT signifies that no tax is deducted from your income.

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