# Tax Codes – Understanding Them In Order To Avoid Paying The Wrong Taxes

When you part with your hard-earned savings to pay your taxes, are you convinced that you are paying the right amounts? Or do you speculate that you may be paying more than what you should? Understanding your tax code and knowing what it method give you a sigh of relief that you are indeed paying what is due the government.

What is a tax code?

The computation of income tax may seem complicated if you do not have a clear understanding of your stated code. Your code is composed of numbers and letters issued by the HM Revenue and Customs (HMRC) to your employer. It is used to determine the right amount of income tax that your employer will deduct from your salary each month. Some tax codes would look like these: 434L, 323P, 456V, K345, DO, NT, BR, and OT.

What do the numbers average?

The numbers represent your tax allowance or the total amount allowed to be deducted from your total income for the year. Your tax allowance is derived by using the following formula:

Tax allowance = Number X 10 + 9

To illustrate, a code of 434L method that you are entitled to a tax allowance of 4,349 that can be deducted from your income for the year to arrive at your taxable income. consequently, if you have earned 30,000 for the year, your income that is unprotected to tax would be 25,651.

What do the letters average?

The letters indicate certain conditions why you have to pay certain amounts that are different from what others are paying. Let’s take a look at some of the letters and what they average:

L – This is the most shared code that refers to basic personal allowances.

P – This applies to people with ages between 65 and 74 who are eligible for complete personal allowances.

Y – This is for people who are more than 75 years old and eligible for complete personal allowances.

K – This method that the amount of allowances is less than the amount of deductions.

T – This indicates that there are things that need to be reviewed by the appropriate Inspector of Taxes.

BR – This stands for basic rate and this method that your total income will be unprotected to the basic tax rate for the current year but you will not be entitled to personal allowances.

NT – This is used when no amount is to be deducted from your income or pension.

D0 – This indicates that you have to pay at a higher rate like 40% because of a second job or pension.

D1 – This method that you have to pay at a higher rate like 50% for multiple income or pension.

Virtually every citizen in the UK is eligible for a personal allowance, which entitles them to a corresponding tax free income. Earnings above the tax free income are unprotected to the basic tax rate up to a certain limit while higher earnings are unprotected to higher taxes according to the income brackets set by the HMRC. consequently, knowing how your tax code as determined by HMRC is important to be able to know if the government is imposing the right amount of assessment on you.