A tax code will affect the amount of tax that a person pays, which means being on the right code for one’s circumstance is important. The most common tax code in this tax year is 1250L. In the 2019/20 tax year, the annual Personal Allowance is £12,500. This means that for most people, the first £12,500 of taxable income is tax-free.
The letter L means that a person is entitled to the standard tax-free Personal Allowance.
This means that 1250L means that the taxpayer is eligible to claim the full Personal Allowance in 2019/20.
It may be that some people have a different Personal Allowance.
For instance, those claiming the Marriage Allowance may have a greater or lesser tax-free amount.
A person may transfer 10 per cent of their Personal Allowance to a spouse or civil partner via the Marriage Allowance, if their loved one earns more.
This would mean that they would get the tax code letter N.
The recipient of the transfer would see their tax code include the letter M.
Some people can lose the Personal Allowance due to high income.
It reduces by £1 for every £2 over a threshold of £100,000 of taxable income per year.
These people should see the letter T in their tax code.
Taxpayers who have a taxable income of £125,000 or more will, in this tax year, lose the entirety of the Personal Allowance.
Those who are eligible for the Blind Person’s Allowance will get an extra amount of tax-free allowance.
In the 2019 to 2020 tax year, this additional allowance stands at £2,450.
It is possible to transfer this to a spouse or civil partner if the person entitled to it does not pay tax or earn enough to use all of the allowance.
While HMRC instructs an employer or pension provider about which tax code to use, it is possible to check if one’s tax code is correct via the gov.uk website.
The tax codes section explain how this is worked out in four steps, as well as providing definitions for the different letters.
Some people may fall victim to tax refund scams – both online and offline.
Tony Mills, Director of Online Tax Rebates, has shared some tips on how a person can reduce this risk, as well as revealing one key sign which could suggest that fraudsters are posing as HMRC.