Everyone in U.K. is entitled for a tax-free allowance. Tax-free personal allowance means that a specific amount earned by a person every year is paid without being taxed. If 1185L is a tax code of an individual for FY 2018/19, it means their personal allowance is £11,850. This amount is obtained in equal portions by an individual throughout the year, so an individual obtains the entire allowance amount by the year-end. This means that in case of receiving payment by an individual weekly then the allowance is equal to £228 per week and in case on getting the amount monthly by an individual, he/she must obtain £988 per month. Beginning 6th April 2018, the new tax code 1185L has been levied and will be put to use by employers or for an additional income source. Except if, an individual is in Scotland, tax is levied on any income above the personal allowance are as follows:
- If the earnings are less than or equal to £34,500, then tax would be 20%
- If the earnings fall between £34,501 and £150,000, then tax would be 40%
- If the earnings are greater than £1,50,000, then tax would be 45%
Let’s understand above mentioned rates with an example. Suppose, the taxable income of an individual is £34,000 and their personal allowance is equivalent to £11,850 then payable tax is as follows:
|Applicable tax rate
The majority of people born post 5 April, 1948 will obtain 1185L as their tax code in 2018/19. Here, letter ‘L’ indicates an individual is eligible to obtain a normal tax-free amount. The below mentioned table shows you a comparable difference between 2017/18 and 2018/19 basic rate limit, tax-free personal allowance, and higher rate threshold.
||Tax year 2017/18
||Tax year 2018/19
|Basic Rate Limit
|Higher rate threshold
What does a Tax Code mean?
All U.K citizen are given a tax-code from tax office HMRC, are those individuals who are either employed or have income through pay-as-you-earn (PAYE). The tax code of an individual carries vital importance as it gives the information about income tax to the employer and that should be deducted from an employee’s salary. The tax office holds the responsibility of placing the charge, of checking the tax code, on the employee. An employee must understand the meaning of his/her tax code and should cautiously check the income tax code. In case of a wrong tax code, an employee will lose the opportunity of claiming a tax rebate.
Part of an individual tax code speaks about the eligibility of Personal Allowance amount that he/she should earn prior to the beginning of paying tax on the earnings. The component of ‘Personal Allowance’ changes every year at the start of the new tax year, hence every individual must check and verify their tax code so as to check the reflected changes. After verification of details, an employee is certain about the accurate tax amount being charged on his/her income obtained from the employer.
To know about the tax code of an individual, HMRC normally send an eligible taxpayers a PAYE notification of coding which gives information about the new tax code. The notification is attributed to as ‘Form P2’ and taxpayers must consistently check when they obtain this information. Form P2 also encloses other information like flat rate expenses and company benefits which can have an impact on the tax amount UK employees have to pay. It is of vital importance to verify all the details given on Form P2 and mention any mistake to HMRC. In case, an individual doesn’t get their P2 notification of coding, the HMRC must be approached for the particulars on the basis of which the tax has been calculated. Also, an individual tax code can also be found by a person in their online personal tax account.
There are various places where tax-code can be found by an individual including form P45 and P60, pay slips or either on HMRC’s PAYE coding notification letters. If an individual has a registration for HMRC’s Self-Assessment online service then the tax code can also be found online. Also, an individual might have multiple tax codes, subject to the number of employers of an individual. In case of a wrong tax-code, an individual should directly contact HMRC and state the changes so that adjustment of the tax-code can be made.
Tax Code Alphabets and their meanings
The letter or alphabet part of a tax code means an alteration to a code which is particular to the circumstances of an individual. Let’s find out the definitions of most common tax-code letters or alphabet are as follows:
L- means an individual is younger than 65 and is entitled to obtain the basic Personal Allowance.
K –Normally used in case an individual obtains a company benefit such as a car.
BR – indicates a basic rate, currently set at 20%. This code is most likely to be used, if an individual has a second job.
Y- means an individual is aged above 75 and gets the maximum Personal Allowance.
DO- indicates an individual who is a higher rate Taxpayer, current rate is 40%
NT-means an individual obtain income which is Not Taxable.