In the UK, your tax code determines how much income tax you pay. Understanding your tax code is crucial because it directly affects your take-home pay and helps ensure that you’re not paying too much or too little tax. One of the most common tax codes in the UK is 1257L. If you’ve seen this on your payslip, it’s essential to understand what it means and how it impacts your income.

What Does the 1257L Tax Code Mean?

The 1257L tax code is used by most employees in the UK for the 2023/2024 tax year. It represents the amount of tax-free income you’re entitled to in that tax year.

Here’s a breakdown of the numbers and letters:

• 1257: This number indicates that you are entitled to a personal allowance of £12,570. This is the amount of income you can earn before paying any tax.
• L: The letter “L” signifies that you are eligible for the standard tax-free personal allowance.

In simpler terms, if you have a 1257L tax code, you won’t pay income tax on the first £12,570 of your earnings in the tax year. After that, any income above this threshold will be taxed according to the income tax bands.

How Does the 1257L Tax Code Affect Your Income?

The 1257L tax code affects your income by determining how much of your earnings is tax-free. If your income is higher than £12,570, the rest of your earnings will be subject to the UK’s progressive income tax rates:

• Basic rate (20%): On income between £12,571 and £50,270.
• Higher rate (40%): On income between £50,271 and £125,140.
• Additional rate (45%): On income above £125,140.

For example, if your total annual income is £30,000, your tax will be calculated as follows:

• The first £12,570: Tax-free (thanks to the personal allowance).
• The remaining £17,430: Taxed at the basic rate of 20%.

Your employer will use your 1257L tax code to determine how much tax to deduct from your salary each month or week, ensuring that your tax-free personal allowance is spread throughout the year.

How Is Your Tax Code Calculated?

HMRC calculates your tax code based on various factors, such as your earnings, benefits, and other sources of income. Here are some key components:

• Personal allowance: For most people, the personal allowance for the 2023/2024 tax year is £12,570.
• Benefits and expenses: If you receive benefits like a company car, private medical insurance, or other taxable benefits, these may reduce your tax-free personal allowance.
• Other sources of income: If you have other taxable income, such as rental income or savings interest, HMRC may adjust your tax code to account for this.

If your circumstances change, HMRC may update your tax code. It’s important to check your tax code regularly to ensure it reflects your situation accurately.

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How Do I Know If 1257L Is the Right Tax Code for Me?

To ensure 1257L is the correct tax code for you, it’s vital to check your payslip and tax code notice (P2 form). You should be on this tax code if:

• You are entitled to the full personal allowance (£12,570 for the 2023/2024 tax year).
• You do not have any other sources of income that would affect your tax code.
• You aren’t receiving taxable benefits from your employer.

If you believe your tax code is incorrect, you can contact HMRC to correct it.

How Can CANGAF Accountants Help?

At CANGAF Accountants, we understand that taxes can be confusing, especially when it comes to understanding your tax code. We offer personalized tax advice and support to ensure you’re on the right tax code and aren’t overpaying. Whether you’re unsure about your current tax code, have multiple sources of income, or receive benefits that might affect your allowance, we can help you navigate the complexities of UK tax rules.

CANGAF can also assist with tax planning and year-end tax reviews to ensure you’re making the most of your personal allowance and minimizing your tax liabilities. We provide comprehensive services for employees, sole traders, and business owners, ensuring you stay compliant while maximizing your income.

CANGAF Accountants
235 Tonge Moor Road, Bolton BL2 2HR
Email: info@cangafltd.com
Phone: 01204 859315