Are you paying too much tax?

4 min read


Making sure you're on the right tax code will help you avoid losing too much of your hard-earned money.

Tax is a part of life and we all pay it in one form or another, but have you ever considered that you might not be paying the right amount of tax? The amount of income tax you pay on salaried income and pension income is dictated by a tax code HM Revenue and Customs (HMRC) gives to your employer or pension provider. Most of us assume that code is correct, but HMRC do make mistakes and you could be paying too much or too little tax as a result.

One area where mistakes are more likely is pension income, because people may have more than one pension or a pension and a wage, and it's more complex to get the tax right when there are multiple sources of income. The Decoding your tax code guide from Royal London estimates that up to 800,000 people, who are under state pension age but receiving private pension income, could be paying too much tax due to errors in their tax code.

What is your tax code for? 

Your tax code is the series of numbers and letters that tells the company that pays your income how much tax they should deduct. HMRC should have sent you a letter telling you your tax code, but if you can’t find that, your code will also be on the payslip you receive from your employer or pension provider.

Everyone's entitled to earn some money before they start paying tax. This is known as your ‘personal allowance’, and is £12,500 in the 2020/21 tax year. Income tax is then deducted at different rates depending on how much you earn. Your tax code tells companies how much personal allowance you have and how much tax they should take.

Deciphering your code

Once you’ve found your code you need to decipher it. The numerical part is your personal allowance with the last digit knocked off. So, if you're entitled to the full personal allowance, the number in 2020/21 should be 1250. The letter gives extra information about your personal tax status. The most common letter is L, which means your income should be taxed at the basic, higher or additional rate depending on how much you are earning. So, if you earn £52,000 a year and your tax code is 1250L, you’ll earn £12,500 tax-free, the next £37,500 of your earnings will be taxed at 20%, and the final £2,000 will be taxed at 40%.

Tax codes start getting more complicated – and more likely to be incorrect – if you have numerous sources of income. For example, you work but also receive pension income. In this situation, HMRC needs to let all the people paying you an income know if your personal allowance has been used up elsewhere or, if your total income is below the personal allowance, that you shouldn’t be taxed.

Common letters seen in tax codes are:

  • BR: All income from this job or pension is subject to income tax at the basic rate. This means you’ve used up your personal allowance elsewhere.
  • D0: The higher rate of income tax (40%) is due on all income from this source.
  • NT: Income from this source is not liable for any income tax.
  • 0T: You’ve used up your personal allowance, and all income from this source will be taxed at a level dictated by your income level.


Find out more

Learn more about income tax, and whether you're paying the right amount, by visiting GOV.UK. If you think there's a problem with your tax code then you should report it to HMRC by calling 0300 200 3300 or visiting the website. HMRC allows you to claim overpaid tax going back four years.

More on managing your finances