HMRC has begun sending cheques and tax repayment letters to households after the end of the previous tax year, and millions of PAYE employees are currently on the wrong tax code. That means workers could be paying too much or too little tax on their earnings.
What happens if your tax code is wrong
If you are underpaying tax, HMRC will eventually notice and you could be landed with a large tax bill that you are legally required to pay. Overpaying means you are handing over more salary than necessary, and it can take months for the taxman to spot the mistake.
Research by Canada Life puts the average tax overpayment at £689, so anyone who has overpaid could be owed that amount or more.
Which tax codes should you know?
For most basic rate taxpayers earning above £12,570, the standard code is 1257L. This should appear on your weekly or monthly payslip.
Emergency tax codes end in W1, M1 or X - for example 1257LWI, 1257LMI or 1257LX. These usually follow a job change or a failure to give HMRC the correct details. If your circumstances have changed and you have not paid the right amount of tax, you will stay on an emergency code until your tax for the year is correct, and you may owe HMRC money or be owed money back.
Other codes to look for: BR means all income is taxed at the basic rate, typically for a second job. D0 means income is taxed at the higher rate, D1 at the additional (top) rate, and NT means no tax is paid on that income.
Martin Lewis: checking your tax code is your responsibility
Speaking on an episode of The Martin Lewis Podcast in January, the money expert said: “Do you know what your tax code is? If you’re an employee you need to, because millions of them are wrong each year and if they are wrong, legally it’s your responsibility not your employer’s and not HMRC’s, to ensure it’s correct.”
He added: “It could mean you’re paying far too much tax each year. You don’t want that. It could also mean, you’re paying too little tax. Sounds good? It isn’t, because at some point they WILL catch up and make sure you pay the tax that you owe.
“So you could be hit, slapped across the face, with a big tax bill and not have the cash to pay it, which is a nightmare. So, each year when you get your tax code you should check it, and if you’ve never checked it before, it’s worth going and finding it now and doing a check.”
