10 min read
Millions of UK workers are currently receiving letters from HMRC, a significant campaign focused on those with 13 specific tax codes. While these letters might trigger a moment of anxiety, they are a crucial step in ensuring tax accuracy and preventing potential financial headaches down the line. In this blog, we’ll delve into the details of HMRC’s latest move, explain what the tax code changes mean, and provide guidance on what you should do if you receive one of these letters.
Why is HMRC sending these letters?
HMRC has stated that the letters are part of an annual review process to ensure that taxpayers are on the correct tax code. If a tax code is incorrect, it can result in either underpayment or overpayment of tax, both of which can cause significant financial headaches.
The tax authority has identified that millions of workers may be on an incorrect tax code due to changes in their circumstances, such as a new job, a change in income, or benefits received from their employer. By sending out these letters, HMRC aims to rectify any discrepancies and ensure that taxpayers are paying the right amount of tax.
What are the 13 tax codes in question?
A typical tax code consists of numbers and letters. The numbers represent your personal allowance, which is the amount of income you can earn before paying tax. The letters are being sent to individuals on one of 13 specific tax codes. These codes are:
1257L – Representing a £12,570 tax-free personal allowance, 1257L was the most widespread tax code during the 2023/24 tax year.
BR – Stands for Basic Rate, meaning all income is taxed at the 20% basic rate.
D0 – Regardless of the amount earned, a 40% tax deduction is standard across all incomes.
D1 – A 45% tax rate is universally applied to all income generated.
NT – No tax is deducted.
0T – No personal allowance is applied, and all income is taxed at the relevant rates.
K codes – Used when deductions (such as unpaid tax or company benefits) exceed the personal allowance.
L – Indicates eligibility for the standard tax-free personal allowance.
M – For individuals who have received a transfer of 10% of their partner’s personal allowance.
N – For individuals who have transferred 10% of their personal allowance to their partner.
S – Indicates that the individual is a Scottish taxpayer.
C – Indicates that the individual is a Welsh taxpayer.
T – Used when other calculations are needed to determine the tax code.
HMRC could send you a letter detailing a modification if your tax code falls within this group.
What are the common reasons for tax code errors?
Tax code errors can arise from various factors, including:
- Changes in employment – Switching jobs, particularly if there are gaps in employment, can lead to incorrect tax codes.
- Incorrect information – Providing inaccurate information to HMRC can result in errors in your tax code.
- Changes in personal circumstances – Changes in your personal circumstances, such as marriage, divorce, or having a child, can affect your tax code.
- Multiple jobs – Having multiple jobs can complicate your tax code, as HMRC needs to allocate your personal allowance across your different sources of income.
- Pension contributions – Changes in pension contributions can also affect your tax code.
If you believe your tax code is incorrect, you should contact HMRC to request a review.
What do these letters mean?
For those receiving these letters, the primary concern is understanding the implications for their own tax situation. The letters are designed to:
- Inform – They provide information about potential tax discrepancies or changes that might affect the recipient.
- Verify – They might ask recipients to verify their personal information or confirm their income and employment details.
- Correct – They might outline steps to correct errors in tax codes or claim refunds for overpayments.
- Update – They might inform recipients about changes in tax laws or allowances that will affect their future tax liability.
In essence, these letters are a proactive measure by HMRC to ensure that individuals are paying the correct amount of tax.
What to do if you receive a letter from HMRC?
Receiving an HMRC letter about your tax code necessitates these essential steps.
- Read the letter carefully – Take the time to understand the changes being made to your tax code. The letter will explain why the change has occurred and how it was calculated.
- Verify your information – Check your payslips, P60s, and other relevant documents to ensure the information in the letter is accurate.
- Follow the instructions – If the letter requires you to take action, such as verifying your information or updating your tax code, follow the instructions promptly.
- Contact HMRC if needed – If you have any questions or concerns, don’t hesitate to contact HMRC directly.
- Keep records – Maintain copies of the letter and any correspondence with HMRC for your records.
How can you avoid tax code issues in the future?
While HMRC’s letters are designed to catch errors, there are steps you can take to minimise the risk of being on the wrong tax code:
- Keep HMRC informed – Notify HMRC of any changes in your circumstances, such as a new job, a change in income, or benefits received from your employer.
- Check your payslips – Ensure the tax code on your payslips is accurate by performing frequent checks. If you spot an error, contact HMRC immediately.
- Use the HMRC app – The HMRC app allows you to check your tax code, view your tax history, and report changes in your circumstances. It’s a valuable tool for staying on top of your tax affairs.
- Seek professional advice – If you’re unsure about your tax code or have complex financial arrangements, consider seeking advice from a tax professional.
- Stay updated on tax law changes: Tax laws and regulations are subject to change. Keep yourself updated on any changes that could potentially impact your tax obligations.
- Check your National Insurance record – Make sure your National Insurance record is correct.
Final thoughts
HMRC’s decision to send out millions of letters to workers on 13 different tax codes is a significant move aimed at ensuring that taxpayers are paying the correct amount of tax. While the letters may cause some initial concern, they are ultimately designed to prevent financial issues down the line.
If you receive one of these letters, it’s essential to take action. Read the letter carefully, check your details, and contact HMRC if you believe there’s an error. By staying informed and proactive, you can avoid unnecessary stress and ensure that your tax affairs are in order. If you are still unsure about it, schedule a free consultation with us.
