Every year on April 6 your tax code changes to reflect the new personal allowance for that year. The personal allowance is the amount you can earn in that year tax free. The personal allowance is not available to additional rate taxpayers, or those earning over £125,000 per year.
What is the standard tax code?
The standard tax code for the 2020/21 year is 1250L, which means you can earn £12,500 as a tax free personal allowance until midnight on April 5, 2021.
Your tax code is always included on your payslip.
This hasn’t changed from last year, so there’s no need to try and change it unless you are on an incorrect code.
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If you are on an incorrect code you could find yourself paying either too much or too little tax, so you should always check to make sure yours is correct.
In Scotland, the tax codes and thresholds are slightly different.
If you’re not on a standard code, it doesn’t necessarily mean your code is wrong, just that allowances and/or restrictions are in place for one reason or another.
What does a tax code do?
A tax code is for your employer to work out how much Income Tax to take from your pay or pension.
HMRC will tell your employer which tax code is right for you.
Income that you have not paid tax on, such as untaxed interest or part-time earnings, and the value of any benefits from your job, such as a company car, are added up.
Most people have the 1250L code.
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What is a personal allowance?
A personal allowance is an amount of otherwise taxable income that you can have tax-free each tax year.
It also applies to non-savings and non dividend income, not just PAYE.
The current personal allowance is £12,500 per tax year, and you are not taxed any income tax on this amount if you are a basic rate taxpayer.
If you earn under this amount per year, you are not required to pay income tax, and your tax code will reflect this.
The tax year runs from April 6 to April 5 and each year the Personal Allowance is indexed with the Consumer Price Index.
The UK tax system is sorted into three bands – the basic rate, the higher rate and the additional rate.
People in the additional tax rate pay 45 percent tax on their earnings over £150,000 per year.
These rates are different in Scotland where income tax is paid to the Scottish Government.
The £12,500 personal allowance is the same in Scotland but there are five tax bands instead of three.
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