Have you been given Tax Code 1257L? Check now as HMRC could owe you £689 | Personal Finance | Finance

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You can do this by checking your tax code, but too many people don’t understand what it is or how to check if it’s correct. If yours is wrong or out of date, HM Revenue & Customs could deduct too much tax from your pay or pension, and getting a rebate takes time and trouble.

One in five have never checked their tax code, according to new research from Canada Life, but this can be a costly oversight.

Among those who have, a staggering one in three found it had been wrong at some point, of whom three quarters paid £689 more in tax than they owed on average.

Pensioners have a fresh incentive to check their tax code this year, as an extra 650,000 will pay income tax as the state pension rises while chancellor Jeremy Hunt freezes the personal allowance yet again.

You can easily find yourself on the wrong tax code if, say, you’ve started a new job and your new employer doesn’t have a P45, or if you’ve recently had a change in salary, or started making flexible pension withdrawals.

HMRC recently refunded a record £42million in overtaxed pension withdrawals.

Your tax code is made up of a series of numbers and letters and HMRC uses this to work out how much income tax you should pay, said Canada Life’s tax and estate planning specialist John Chew. “1257L is the most common code, typically used where you have just one source of income, either through a job or pension.”

The L indicates that you entitled to the standard tax-free personal allowance, which is currently £12,570.

Tax code 1257L won’t apply if you have additional sources of untaxed income, for example, from a side hustle or renting out a property.

Nor will it apply if you have taxable company benefits, say, such as a company car, or are taking a pension from more than one source.

In that case, you’ll need to inform HMRC and get the right tax code.

This is where things get complicated, Chew said. “Your tax code can vary if, say, you receive benefits from your job, such as a company car or healthcare. HMRC can also apply a different tax code to claim back underpaid tax.’

There are more than 20 different letter combinations in total, and you can check their various meanings online at Gov.uk.

If your tax code has ‘W1’ or ‘M1’ or ‘X’ at the end, you have been given a temporary emergency tax code.

If you think your tax code is wrong, you need to contact HMRC directly, even if you have an employer, as they cannot do this for you.

You may be owed a rebate, although equally, you may owe tax. Either way, it is best to find out the right amount.

If HMRC has spotted an error, it may send you tax calculation form P800 form or a Simple Assessment letter by the end of the tax year on April 5, which will tell you how to pay HMRC or reclaim overpaid tax. “You will only be sent one of these forms if you are employed or receive a pension,” Chew said.

You only have four years to reclaim overpaid income tax, so the earlier you contact HMRC, the better, he added.

Adam Bennett, workplace expert at Digital ID, said if you receive a payslip from an employer, your code should be on that. “Compare it to the code you were given at the start of the tax year or when you changed jobs.”

If you recently switched jobs, your P45 should display the correct code. “Your P60 form will also show the code used during the tax year.”

Otherwise, visit government portal gov.uk/tax-codes or contact HMRC directly.

Bennett said codes are most likely to be wrong if you have multiple jobs or pensions, or if you recently got married, moved house or changed jobs.

Over-55s who make flexible lump sum pension withdrawals also risk ending up on the wrong code and paying too much.

A wrong tax code could trigger a shock bill from HMRC, possibly with interest and penalties, Bennett said. “If you have paid too much tax, you can apply for a refund.”

Mistakes can happen, he added. “The key is to catch them early.” It may seem daunting, but it is worth taking time to crack the code.

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