Everyone who works and lives in the UK has a tax code which they received from HM Revenue and Customs. The purpose of this tax code is simply to tell you how much tax relief you are entitled to and therefore help you determine how much tax you are expected to pay. Even though many people don’t really pay much attention to these codes, it’s important to note that knowing and understanding your tax code can be beneficial to the point of helping you determine if the government owes you any tax refunds.
Today, we’ll look at how you can calculate the amount of tax you’re expected to pay if you’re under tax code 653L.
Determination of tax-free allocation
The first step in determining your tax amount is to determine what your tax-free allowance is. In the case of someone whose NIF is 653L, the tax-free bonus will be:
653 X 10 = 6530
Here, the duty-free allowance is £6,530, which is arrived at by taking the code figures and then multiplying the amount by 10, giving you £6,530. When calculating your annual tax due, it is assumed that the first £6,530 of your income is not subject to tax. This means that if you earn 6,530 ponds or less, you will pay zero tax; however, any pound over this figure will be taxed at the rate stipulated by Her Majesty’s Revenue and Customs.
The tax refund
As we have indicated before, knowing your tax code can help you know if the Treasury and Customs owe you some money or not. But how does this happen?
Well, since as an employee you pay your taxes through the Pay As You Earn scheme, the annual tax-free allowance will not be used, but the monthly allowance will be used. The 6530 is divided by 12 months, giving you a tax-free monthly allowance of £545. Arriving at the figure of 545 pounds, it is assumed that you will earn a constant amount during the fiscal year. Now imagine a scenario where you were employed from January to March, but then lost your job and were unemployed for the year. The total amount of tax-free relief you would have actually used would only have been £1,635, not the £6,530 you are entitled to. For this reason, you will need to apply to HM Revenue and Customs to reimburse you for any money owed to you.
