It looks like an innocuous set of digits, but your tax code has a critical impact on your finances as it tells your employer how much tax to take. Millions of people have been hit by errors, some are due £1,000s back.

This guide includes the Tax Code Calculator to ensure you're on the right tax code, and how to reclaim overpaid tax back. And for those who've underpaid, it explains what you can do if they want you to pay it back.

Thanks to Tony Tesciuba (Tesciuba Ltd) & Matthew Brown (Chartered Inst of Taxation) for feedback/suggestions. Every effort's been made to ensure accuracy, yet this guide isn't authorised, tailored tax advice (get help here). We can't take responsibility nor accept liability for damage or losses; you use the info at your own risk.

What's a tax code?

On the face of it, a tax code is a dull and harmless series of numbers and letters - 944L, BR and K497 are just some examples.

But these hieroglyphics are used by your employer to calculate the amount of tax that should be deducted from your wages or pension BEFORE they hit your bank account.

Therefore if you pay tax through PAYE, then the tax code tells your employer or pension provider what it should take - and even small errors can lead to mistakes of £100s.

So the aim here is to find your tax code and decipher what it means, to see if it's correct. Don't worry, we'll take you through it simply.

Then you can punch it into our unique tax code calculator which will give you a steer on whether you may have over- or underpaid. Finally, and most importantly, the guide will explain step-by-step what to do about it...

This isn't small change - people have reclaimed £5,000+!

Since launching this guide in late 2010, we heard of quite a blast of successes after Moneysavers used the Tax Code Calculator! We'll let forumites Chris Kendall and nat21luv take over the tale. Please tell us about your tax rebate successes.

I got the MSE email, checked my tax code, rang HMRC and it told me I'd get between £5,000 and £7,000 back. Incredible!

"It's all because it'd been deducting for a company car and medical insurance that I've never had in this job." Chris Kendall

I've rung HMRC and a letter is in the post. I've been on the wrong tax code and paying too much since 2005!

"I've had a cheque for £3,698 dating back to 2006 and that's not including this year's return either! I'm very happy indeed and would of been none the wiser had it not been for MSE so thank you very, very much and for once I'm looking forward to Christmas! nat21luv

It doesn't stop there - if you wash or repair a
work uniform yourself, you may be able to reclaim £100s.
See Work Uniform Tax Rebates guide.

Step 1. Finding your tax code/what it means

Taking on your tax code is not an appealing task for even the most dedicated MoneySavers. But it doesn't have to be that gruelling.

How do I find my tax code?

It's listed on your 'coding notice', payslips or P45s. The most important thing to remember is...

Each income source (job, private pension) will have different tax codes. Check them all!

If you need more help finding your code, see the tax code finding tips.

What does my code mean?

Tax codes are made up of two main elements, which determine the amount of tax your employer will take. If you work for multiple employers (or work and also draw a pension), you'll have more than one code.

Here is a classic example of a tax code. It will usually be made up of numbers and letters:

What SHOULD your tax code be?

This is where you need to switch on your brain. The key bit to check it's correct is the number...

• Find your personal allowance
  The first thing that HMRC does to establish your tax code is to tot up all of your tax allowances - in other words how much you can earn before you start to pay tax. In many cases this will be just your personal allowance.

  
  More on personal allowances
  For the 2013/14 tax year, the basic personal allowance for someone aged under 65 stands at £9,440. So if you earn less than this during the year, you won't pay any tax at all (some 'non-doms' don't get one at all).

  • Remember that the amount of this personal allowance can change with every tax year but it doesn't have to.
  • If you earn more than £100,000, this basic personal allowance starts to taper downwards inversely proportionally to your salary. In other words, for every £2 you earn above £100,000, your personal allowance will erode by £1. This happens all the way up to £118,880, by which point you will be stripped of your personal allowance altogether.
  • Your personal allowance can increase as well as decrease. As you get older, your basic personal allowance grows, meaning you can earn more before paying tax.
    
    For example, those born between 6 April 1938 and 5 April 1948 will be able to earn £10,500 tax free in the 2013/14 tax year without coughing up to HMRC. And if you were born before 6 April 1938 are still grafting aged 75 and beyond, you can earn the first £10,660 tax-free.
    
    
    
    In 2013/14, these increased allowances for those born before 6 April 1948 are on the condition that your annual income from all sources doesn't exceed £26,100. Above this level of earnings, your personal allowance tapers away, decreasing by £1 for every £2 you earn.
    

  
  

  Can anything else affect my personal allowance?
  There MAY be other factors that can boost your personal allowance. For example, if you are part of a married couple or civil partnership and aged over 75, you can qualify to transfer up to £7,915 of any unused couple's allowance to your spouse in 2012/13. If you are registered blind and working, you can add a blind person's allowance too.

• Are there any deductions?
  Any income you haven't paid tax on at source is known as your deductions. The usual suspects are taxable employment benefits or extra income, eg, renting out a property or State Pension.
  
  Common taxable benefits include discounted rent or household bills, vehicle usage, medical insurance, some travel costs, payment in vouchers and goods bought on company credit cards.
• Use these to make the number in your tax code
  These deductions are subtracted from the total amount of tax allowances you get (probably your basic personal allowance), and what's left is the total amount of tax-free income you are permitted in each tax year.
  
  HMRC then removes the last digit of this number (so 944 in the case of the standard £9,440 personal allowance) - and hey presto! You've established the number part of your tax code.

In the majority of cases, these numbers will be followed by a letter. And this letter will vary according to your particular circumstances.

Step 2: The Tax Code Calculator

To try to help you work out whether your code's correct, we've devised an easy-to-use calculator to give a ROUGH answer (it's impossible to be exact). If it seems to be wrong, it shows it could be worth taking action to check out whether you're owed cash (or will be asked to pay back).

Key fact:
Under 65, have one employer (& no employee benefits), earn under £100,000? Your 2013/14 code should probably be 944L.

Before using the tax code calculator

HMRC's famous slogan that 'tax doesn't have to be taxing' is well-intentioned but is rarely true. If you don't fit the average working mould, click on the following boxes for an explanation of how your situation differs - it may explain any discrepancies in the code. There's lots of extra info on the HMRC and Gov.UK websites too.

Vote in our poll:
Tax Code Checker: How much did you get?

Step 3: If you think your tax code's wrong

Now you understand what your tax code means, you will be able to assess whether it's likely to be correct for your earnings, age and situation. If your tax code doesn't look right, it probably isn't.

In either case, don't panic.

If you have overpaid tax, the money will come back to you. And if you have underpaid, not only do debtors' prisons no longer exist, but you won't have to pay it back all in one go.

• If you are paying too much, you have not lost the cash - you can claim it back.
• If you are not paying enough, you have not won - you will likely be hit with a nasty surprise bill later down the line.

The onus is on you to get on the right tax code! We now have two possible scenarios, and one is much more fun than the other!

I've underpaid - what happens now?

In most cases you'll have to pay it back - and unlike when you have overpaid there is NO limit on how far back the taxman can go back, though this current reconciliation is dealing with the last three years.

How this works depends on the amounts involved and how HMRC has dealt with your case.

But it wasn't my fault I am on the wrong code!

That doesn't matter. We may have done away with the stocks these days, but the state wants its cash as much as ever. This means that even if you are on the wrong tax code through no fault of your own, the same procedures will apply.

The official line from HMRC is that it is each individual's responsibility to you check they are on the right tax code, so mistakes made by former employers are technically your problem.

However in light of the recent massive publicity over the huge number of people who have been in the wrong code, some limited concessions have been made, such as writing off underpayments of under £50 for underpayments in the last year (see below).

Is the underpayment more than a year old?

The one potential hope to challenge goes by the not-so-catchy name of an Extra Statutory Concession - or an A19 (read about this on HMRC website). However, HMRC is looking to make it much harder to claim using the A19 concession - more below

It's a little-known clause that lurks deep in HMRC's complex book of rules stating that..

If the taxman failed to inform you of underpayment within 12 months of the tax year's end, your debt COULD be written off.

This ISN'T guaranteed, and in fact it's far from likely it will work, - you must strictly fulfil the following criteria - but it could do, so it may be worth giving it a go.

• The overpayment is more than 12 months old.
• HMRC was given the CORRECT information (which is purely on the onus of you and your employer but if you're one of the 'mistake' cases that's likely).
• Lastly, you will need to genuinely demonstrate a 'reasonable belief' that your tax affairs were in order which can become pretty tricky - if you suddenly started receiving loads more pay, it can be argued you should have spotted it!

This means that at present, if you underpaid in the 2011/12 tax year or earlier you may be able to go the A19 route.

You will also need to have all your paperwork and dates in perfect order.

However, if you feel as though injustice has been done and, as a result, you can overcome these hurdles and apply for exemption under an A19 simply by calling the HMRC.

With thanks to the Low Income Tax Reform Group

It emerged in March 2012 that around a quarter of appeals using the A19 route had been successful since September 2010, showing it is definitely worth a go if you qualify - read MSE News: A19 success. We have also received emails telling us of successes - one reader had a £1,700 repayment written off after HMRC didn't follow procedures properly.

"I am delighted to tell you that my underpayment (£1,700) has been written off under the A19 ruling. The underpayment HMRC had already started deducting from my pension has been refunded."

Changes to the A19 concession

HM Revenue & Customs proposes to change the A19 concession to make it harder to claim. The main change will be a change in emphasis, making you (not it) responsible for checking your tax code to make sure it's correct - if you've not done this, your appeal won't be upheld.

Reports from tax advisers using the A19 concession for clients tell that claims which would have been approved by HMRC in previous years are being rejected - mainly on the "reasonable belief" criterion - did the taxpayer check their coding notice, and that it was a true reflection of their circumstances?

It's doubly important now to make sure any claim is watertight, and also to go in with little hope of a good outcome - the previous 1 in 4 success rate is unlikely to be achieved now - especially if you can't prove that you checked your tax code when sent it, and notified HMRC of any errors at that point.

In any case, ESC A19 may have a limited shelf life. HMRC reconciles all cases of complicated tax affairs at the end of every tax year - meaning that it's very unlikely that more than a handful of cases will receive notification of underpaid tax more than a year old.

Q. Will I have to pay it all in one go?

When HMRC began sending out letters asking for multiple years-worth of old underpayments back it confirmed that if you owed less than £300, the 'debt' would be written off; great news! On top of this, any underpayments requested for the tax year immediately previous won't be requested if they are under £50 (you likely won't even be aware of this, as HMRC won't contact you if you owe less than £50.

But not so good is the statistic that the average underpayment is around £1,400, meaning a big bill for many.

The good news is, you won't have to pay all this back in one go - you can call HMRC and arrange a payment plan instead. There is only one kind of payment plan in this case, which involves taking instalments at source from your earnings over the three tax years.

And you'd better brace yourself because this will mean your tax code will have to be altered accordingly - meaning higher bills in future years.

Q. How do I repay it?

That will depend on the amount you owe...

• If you owe less than £3,000:
  
  HMRC may simply adjust your tax code at the start of the new tax year to claw back the sum you owe. For example, if you had underpaid £300 during the last tax year, you would need to be taxed on an additional £1,500 of income (if you paid basic rate tax of 20%) over the next tax year to repay this sum.
  
  This means that £1,500 would need to come off your personal allowance for the next tax year. Assuming you have the standard tax code of 944L, it would be adjusted to read 794L (9,440 minus 1,500 with the last digit removed).
  
  If that happens, ensure you do a full budget (see the free budget planner) to incorporate your decrease in disposable income.
• If you owe more than £3,000:
  
  For bigger sums over £3,000, HMRC will send you a bill regardless of the point in the tax year and give you 30 days in which to cough up. If you cannot make the payment, don't worry - you can call the tax office and arrange a repayment schedule.
  
  In cases where the underpayment has been quite serious - for example you have a couple of rental properties you have not declared income on - you may be required to enter the Self Assessment system and maybe pay interest and fines.

Q. Will I have to pay interest and charges on what's owed?

HMRC has a right to ask for backdated interest on the tax owed to put itself back in the 'commercial position it would be in' had you paid on time. However, if your tax shortfall is a one-off through a tax code error, you will probably be let off.

However if the amount you owe above £3,000, you are put into the Self Assessment system. In this case, if your backdated payment is due on 31 January and you don't cough up by 28 February (four weeks later), you will be hit with a £100 penalty charge and a surcharge of 5% of the tax outstanding (payable again on 31 July if the bill is still not paid) plus interest.

Q. Can I challenge the deadline HMRC sets me?

For most, there are no 'challenges' allowed against payment deadlines when it comes to the taxman - just consequences of missing them.

For more information read the HMRC's 'Time to Pay' guidance.

Q. What if I just can't afford to pay it back?

In this case you should inform the HMRC of your hardship (and be able to back it up). In some extreme cases the underpayment could be wiped.

For example if they believe you will never be able to repay it (e.g. your underpayment comes from a past salary, and you are now retired earning only the state pension). It's unlikely for most people but worth discussing - see the tax help agencies at the end of this guide.

Please report successes/failures getting money back in the
tax code calculator successes forum discussion

It doesn't stop there - if you wash or repair a
work uniform yourself, you may be able to reclaim £100s.
See Work Uniform Tax Rebates guide.

Step 4: Keep an eye on your future codes

With any luck, once you have established the right tax code, it'll all be sorted with HMRC from then on - unravelling the web of complexity surrounding tax codes and what you ultimately should be paying. Yet don't bank on it...

Small changes can change your code

Every time your circumstances change - whether it's a promotion at work with a larger salary or added benefits, taking on another job, giving up work to have children or leaving the country and the UK tax system behind altogether, your tax code may change, so it can be worth getting onto HMRC to establish your new tax code.

A phone call today (even an expensive one) can save an awful lot of hassle and expense in the future...

Get free tax help

This guide is to give you general information about tax codes to help see if you're on the right track. Yet it's no substitute for personal advice if you need it - and you should always take care to ensure you're definite about any actions you're taking.

The following organisations all give help and advice and some don't charge a fee, so give them a try if you are struggling:

Tax Aid: Send your enquiry via www.taxaid.org.uk

Citizen's Advice Bureau: Visit www.citizensadvice.org.uk to get the number of your local Citizen's Advice Bureau

Low Income Tax Reform Group: This is an initiative from the Chartered Institute of Taxation, aimed at those with low incomes who have tax problems. Visit www.litrg.org.uk

Tax Help for Older People: Visit www.taxvol.org.uk or call 01308 488066

Find a tax adviser: If you can afford it and have more complex affairs. You can use the Chartered Institute of Taxation's 'Find a Tax Adviser' search.

Leave feedback on this guide:

Tax codes discussion

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