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What is a tax code?

Get taken through all the basic queries about working out tax codes to make sure your tax affairs are in order.

A tax code is used by your employer or pension provider to calculate the amount of tax to deduct from your pay or pension. If you have the wrong tax code you could end up paying too much or too little tax.

A tax code is usually made up of several numbers and a letter, for example: 117L or K497.

If your tax code has two letters but no number, or is the letter 'D' followed by a number, it is normally used where you have two or more sources of income and all of your allowances have been applied to the tax code and income from your main job or pension.

There are four steps to working out your tax code:

(1) Your tax allowances are added up. (In most cases this will just be your Personal Allowance and any Blind Person's Allowance. However in some cases it may include certain job expenses.)

(2) Income you've not paid tax on (for example untaxed interest or part-time earnings) and any taxable employment benefits are added up.

(3) The total amount of income you've not paid any tax on (called 'deductions') is taken away from the total amount of tax allowances. The amount you are left with is the total of tax-free income you are allowed in a tax year.

(4) Broadly speaking, to arrive at your tax code the amount of tax-free income you are left with is divided by 10 and added to the letter which fits your circumstances. The appropriate letters can be found on HMRC's website.

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