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Below are the 6 database entries on the subject of Tax Code.

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How is my tax code adjusted to collect the tax I owe? :
Your tax code works by giving you a certain amount of tax free income each year. Reducing the tax free amount means you pay more tax. Doing this sufficiently and the extra tax you pay can be made to equal the tax you owe. However, the reduction in your code will not be the same as the tax you owe. For example, you might owe £440. If you pay tax at 20%, your code would go down by £2200. (At 20%, the tax on an extra £2200 is £440.) Your tax code should show both the amount you owe, and also the actual adjustment needed to collect it.
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How does my tax code work? Something like "549L" does not tell me much. :
Your tax code is made up of allowances and deductions. First of all you add up your allowances, then you take away all your deductions. Assuming the result is a positive number, it is taken away from your total taxable income before tax is calculated.
For instance, a code 549L may comprise Personal Allowance of £5435, plus business expenses of £740, giving a total of £6175. From this you may have medical insurance benefit of £680. Taking this away from your allowances gives a net amount of £5495. This is the amount of your tax-free allowances. The code is simply this number with a letter substituting the final digit.
Each time you are paid, a proportion of that amount is taken away from your salary. For instance, if your salary is £1000 per month, you will only pay tax on £542. Each month £458 is paid to you tax free. (£5495 divided by twelve equals £458 approximately.)
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How does my tax code work if it has a K in it? I've heard that this is different than usual. :
A tax code including a 'K' indicates that your deductions exceed your personal allowances and reliefs available. Whereas a normal tax code gives you a tax free amount over the tax year, with a 'K' code you have no tax free amount and instead are charged additional tax to cover the shortfall.
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My tax code has an explanation that it is done "on a special basis" and I will be taxed as though it is the first week of the tax year. I do not understand this. :
Tax is usually collected on a cumulative basis throughout the tax year. However, where the tax code is amended part way through the tax year to reduce the tax free allowances available, the code is usually issued on a 'week 1' basis. This means that tax is now collected on a non-cumulative basis until the end of the tax year. This is to avoid any excessive amounts of tax being collected in one lump sum from one week's / month's salary. Any potential underpayment arising from the 6th April to the date the code was changed will be reviewed after the end of the tax year.
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I have just had a new code that mentions a potential underpayment. Can you explain this? :
Your tax free allowances have been reduced. As a result, you may not have paid enough tax from the 6th April to the date the code was amended. To avoid this being collected in one lump sum through your salary or pension, your code has been issued on a 'week 1' basis.
The potential underpayment is the amount the Revenue has estimated that you owe. It will be reviewed after the end of the tax year.
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Can I question my Tax Code? I do not think it is right. :
If you do not think that your tax code is correct, you should always query it. You can do this by contacting your professional advisor or contacting H M Revenue & Customs directly and providing them with up to date information.
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