Britons are being urged to check their tax code is correct, as those on the wrong tax code are paying billions of pounds in excess tax.
Millions of taxpayers could be affected, potentially overpaying or underpaying tax, according to research by Canada Life.
The warning comes as the PAYE tax collection system, which was first introduced to 15 million people earning over £100 a year in January 1944, turns 80 years old.
Clare Stinton, head of workplace saving analysis at Hargreaves Lansdown, said: “Tax codes look like a bewildering blend of numbers and letters, but they hold huge significance for our finances.”
Tax codes are used to calculate how much income tax should be deducted from a person’s wages or pension, meaning if it’s wrong, people could be paying more tax than they need to.
Ms Stinton added: “But millions of people could have the wrong tax code, and you can’t assume your employer, or the taxman will check this for you.
“It’s up to you to spot any mistakes, so you need to crack the code.”
As well as the risk of overpaying tax, failing to check a tax code could mean an employee is paying too little tax – and this could lead to a big tax bill later on.
“Nobody wants to hand over more tax than they should, but then again it you’re underpaying, you could be in for a nasty surprise when the taxman comes knocking for what’s owed,” the workplace saving expert said.
A tax code is made up of numbers and letters. The former refers to the tax-free income available, with a zero removed from the end of the code.
Meanwhile, the letters signify the separate situations that can affect the personal allowance.
It’s possible to check how much income tax a person should be paying in the current tax year online, via the “Check your Income Tax for the current year” tool on Gov.uk.
If a person thinks their tax code is wrong, they are directed to contact HMRC as soon as possible.
In 2023/24, the most common tax code is 1257L. It means they are entitled to the full personal allowance of £12,570, and L refers to them being eligible for a tax-free personal allowance.
This is what a person with one job or pension who is earning under £100,000 a year will typically have.
If it were followed by “W1”, “M1” or “X”, then this would likely suggest the taxpayer is on an emergency tax code.
New employees who don’t have a P45 will likely get this.
It’s possible to check how much income tax a person is due to pay online via the government website
What do other tax code letters mean?
M and N relate to the marriage allowance, a tax break for married couples or those in a civil partnership. It allows non-taxpayers to transfer 10 per cent of their personal allowance to their basic-rate tax-paying partner.
M means the person has received 10 per cent of their partner’s allowance, and N signifies having given it.
The letters OT mean a person isn’t eligible for a tax-free allowance, hence income is taxed in line with income tax bands.
Workers who earn more than £125,140 may have this once their personal allowance has been tapered away. This is because people start losing part of their personal allowance after they earn more than £100,000, at a rate of £1 for every £2 earned over the threshold.
S means Scottish rates of income tax are being applied, while C means pension or income is taxed using the rates in Wales.
T will usually be applied in more complex tax situations, perhaps if there are multiple income sources which need to be reviewed by HMRC.