Why Understanding the 1257L Tax Code is Crucial for UK Employers

As an employer, you probably already know that the UK tax system can be a bit of a maze to navigate. But don't worry; we're here to help you out.

One crucial thing you need to know about is your employee's tax code, which determines how much tax you need to take out of their pay. For the current tax year, the most common tax code is 1257L.

You might be wondering what exactly these codes mean and why they’re so essential. It's important to be aware of tax codes and make sure you're deducting the correct amount of tax from your employee's pay. By doing so, you can avoid any potential issues with HMRC and ensure that your business is running smoothly.

While the UK tax system may seem daunting, understanding tax codes is important and we’re here to break it down for you.

What is a tax code and how is it determined?

A tax code is a combination of numbers and letters that quickly identifies how much income tax an employee needs to pay. It’s based on the employee's personal allowance and any other taxable income or benefits they receive.

Codes are defined by HM Revenue and Customs (HMRC) and appear on employees’ P45, P60 or payslips. If you can’t find a new employee’s tax code from a P45, an emergency tax code might be issued until a correct code is retrieved.

What is the significance of the number in a tax code?

The number in a tax code represents the amount of tax-free income an employee can earn in a tax year. This is known as the personal allowance and is determined by HMRC based on the employee's circumstances.

The number is multiplied by 10 to get the total amount of income an employee can earn before being taxed. For example, the tax code 1257L means an employee can earn £12,570 tax-free in the tax year.

Employers need to ensure that they have the correct tax code for each employee to ensure they are deducting the correct amount of tax from their pay.

What should you do if an employee's tax code changes?

If an employee's tax code changes, HMRC should be notified.

You should update your payroll records as soon as possible and deduct the correct amount of tax from the employee's pay as appropriate. It’s important to note that an employee's tax code can change if their personal allowance goes up or down or if they start or stop receiving taxable benefits.

You should regularly check for updates to your employees' tax status and ensure they are always using the correct code.

Can I use the same tax code for all my employees?

You can’t use the same tax code for all your employees.

While the 1257L tax code is the most common, you should be cautious about applying it to everyone on your payroll without double-checking.

Employees may have unique circumstances that depend on various factors including their income, personal allowance, taxable benefits, and untaxed income. HM Revenue and Customs (HMRC) will provide each employee with a tax code that is specific to their individual circumstances.

As an employer, it’s your responsibility to ensure that you use the correct tax code for each employee to avoid under or overpaying tax.

What happens if I use the wrong tax code for an employee?

Using the wrong tax code for an employee can result in over or underpayment of tax.

If you use a higher tax code, you will deduct less tax than necessary, which could result in underpayment of tax. On the other hand, if you use a lower tax code, you will deduct more tax than necessary, which could lead to overpayment of tax.

Both scenarios can cause problems for your employees and they may also lead to penalties for your business. Therefore, it is essential to ensure that you use the correct tax code for each employee.

How do I check an employee's tax code?

As an employer, you can check an employee's tax code by accessing HMRC tax code tices or checking your payroll software if it has this feature.

If you are unsure about an employee's tax code, you can also ask them to provide a P45 or P60. These documents contain information about their tax code, income, and tax deductions. You can also contact HM Revenue and Customs (HMRC) to confirm an employee's tax code.

Can an employee have more than one tax code?

An employee can have more than one tax code if they have multiple sources of income or taxable benefits from different sources.

If an employee has more than one tax code, it is important to ensure that you use the correct tax code. For a second job, an employee’s tax code will usually end in BR, D0 or D1.

What happens if I don't update an employee's tax code?

If you fail to update an employee's tax code, you might end up deducting the wrong amount of tax from their pay. This could lead to over or underpayment of tax, causing problems for your employee and your business.

HM Revenue and Customs (HMRC) may also penalise you for incorrect tax deductions. Therefore, it is important to keep up to date with any changes to an employee's tax code and update your payroll records as appropriate.

Summary

Tax codes are an essential aspect of the UK's income tax system that employers need to be aware of. It is crucial for employers to keep their employee's tax codes up-to-date, especially if they change during the tax year. Business owners must also ensure that they account for any taxable benefits when determining an employee's tax code and be aware of emergency tax codes to avoid employees paying too much tax.