Payroll Management and Checking You’re Using the Right Tax Code!
Understanding Tax Codes
Tax codes are a crucial element of payroll management. They dictate how much Income Tax should be deducted from an employee’s pay. Only then can employers and individuals be sure they’re paying the right amount of tax to HMRC. Generally, tax codes are a combination of numbers and letters, with the numbers representing an employee’s personal allowance and the letters providing additional information about their tax situation. HMRC will often contact you to explain how they worked out your individual tax code if your tax code changes.
Common Tax Code Errors
Mistakes in tax codes can lead to employees being overtaxed or undertaxed. So, they can result in potential penalties or financial difficulties. Common tax code errors include:
1) Incorrect personal allowance:
The standard tax code for the 2023/2024 tax year is 1257L, representing a £12,570 personal allowance. This is likely to be the most common tax code for people who have one job or pension. If an employee has a different tax code, it could indicate a miscalculation in their personal allowance.
The letters in your tax code relate to other items that impact your personal allowance. Details of all these letters and what they mean, is available in HMRC’s online guidance. Two of the common reasons for different letters being used though are as follows:
- Marriage allowance transfer – this where 10% of the personal allowance has been transferred from one individual to their partner.
- Income not taxed at source – an individual may have other income that does not have income tax deducted at source when it is received by the individual
It is incredibly important for an individual to review there tax code to ensure the information being used by HMRC to calculate their tax code is correct.
2) Emergency tax codes:
If an employee has a tax code that ends in ‘M1′,’W1’ or ‘X’, they may be on an emergency tax code. This could result in them paying more tax than they should. So, it is always important to check your code and ask for guidance if you are at all unsure.
3) Changes in circumstances:
If an employee has experienced a change in their financial situation, such as a new job or receiving a pension, their tax code may need to be updated accordingly. As mentioned above, HMRC will often contact you to explain how they worked out your individual tax code if your tax code changes. So, all should (theoretically) be explained along the way.
Verifying Tax Codes for Accurate Payroll Management
To ensure accurate payroll management, it’s vital to regularly check and verify the tax codes you’re using for your employees. Here are a couple of steps to help you do that:
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Update employee information:
Regularly update your employee records to reflect any changes in their circumstances, such as marriage, divorce, or additional income sources.
Consult HMRC:
If you’re unsure about an employee’s tax code, contact HMRC for guidance. They can help you determine the correct tax code and resolve any discrepancies.
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In short…
Proper payroll management is essential for the financial well-being of your employees and your business. By understanding tax codes and ensuring their accuracy, you can prevent potential issues with HMRC and maintain a healthy payroll system. Regularly review and verify the tax codes you’re using, and don’t hesitate to seek guidance from HMRC or a professional accountant (like us!) if you’re unsure about the correct code to apply. Reputable accountants and tax advisers are always happy to help. So, do reach out if you are at all concerned – wed’ be glad to see how we can help!
If you’d like to speak to one of our experts about your accounts, please call 01243 782 423. Alternatively, please email from our contact page and we will be in touch!
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