Have you ever noticed the Do tax code on your payslip? Well, if you work in the UK, you might see this tax code causing your take-home pay to suddenly get lower. In simple words, the Do tax code is used by HMRC when all of the income from a particular job or pension is taxed at the higher rate of Income Tax, rather than the basic rate.
Understanding why HMRC has assigned you this code can help you ensure that you are not paying any extra money in taxes.
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What Is the Do Tax Code in the UK?
The Do tax code generally means that all taxable income from that particular employment or pension is taxed at the higher rate. But the question is why? For most taxpayers in England, Wales and Northern Ireland, the higher Income Tax rate is currently 40%.
Unlike a standard tax code such as 1257L, D0 does not give you a Personal Allowance against that source of income. Then, it automatically cuts more money from your take-home pay than what it should actually be. This can happen if your Personal Allowance may already be allocated to another job or source of income.
For example, you might have:
- A main employment where your Personal Allowance is used.
- A second job where HMRC applies the Do tax code.
In this situation, income from the second job may be taxed at 40%.
Important: Scotland has different Income Tax rates and tax codes, so the treatment can differ for Scottish taxpayers.
Example of PAYE on Tax Code D0
Suppose you earn £1,000 in a month from a second job and your employer is using the Do tax code.
If the full £1,000 is taxable at 40%: £1,000 × 40% = £400 Income Tax
You would therefore have approximately £600 left after Income Tax. Yes, this is before considering any National Insurance or other deductions that may apply.
This does not necessarily mean you are paying too much tax. Instead, HMRC may have determined that your Personal Allowance is already being used elsewhere.
Why Might HMRC Use a Do Tax Code?
Are you wondering if you do not have a full-time second job, then why are you getting Do tax code? Then you should know that there are several reasons why HMRC may issue a Do tax code, such as:
- You have more than one job.
- You receive a pension alongside employment income.
- Your Personal Allowance is being used against another source of income.
- HMRC expects the income from this employment to fall within the higher-rate band.
- Your tax circumstances have changed, and HMRC has updated your tax code.
Thus, your tax code is not necessarily permanent. HMRC can change it when your circumstances change, and if it’s incorrect, you can get it corrected as well.
How Can Being on a Do Tax Code Impact Your Earnings?
The biggest impact is your take-home pay. Because with D0, your net earnings can be lower than they would be under a basic-rate code. However, the important point is that D0 does not automatically mean you are paying too much tax.
As mentioned, your overall tax liability is based on your total taxable income and circumstances for the tax year. If HMRC has allocated your allowances incorrectly, however, you could end up paying more tax through PAYE than necessary.
For this reason, check your HMRC tax account and payslips if your income or employment circumstances have recently changed. Staying proactive is a must to prevent extra tax on your income.
How to Change My Do Tax Code?
If you believe your Do tax code is incorrect, you should first check your Income Tax information with HMRC.
You may need to update details such as:
- Your current employers
- Your expected income
- Your pension income
- Benefits or other taxable income
- Which employment should receive your Personal Allowance
If HMRC determines that your tax code should be different, it can issue a revised code to your employer or pension provider. Your employer will then use the new code through PAYE.
Can an Accountant Help With a Do Tax Code?
Yes. An experienced accountant can help you understand how your tax code fits into your overall tax position. Because if you have multiple income sources, changing employment, pension income or a more complicated tax position, calculating taxes on your own may be difficult.
An accountant can also review your payslips, estimate your tax liability and help identify potential discrepancies that may need to be raised with HMRC. So, you should seek professional help to save your money and time.
Need Help Understanding Your Tax Code?
For a common employee, tax codes can become confusing when you have multiple jobs, pension income or other taxable income.
At Cheap Accountants in London, our accountants can help you understand your PAYE position, review your tax calculations and provide guidance if the Do tax code is incorrectly applied. Get in touch with our team for professional UK tax and accounting support today!
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Final Thoughts
The Do tax code can look alarming when you first see it on your payslip. Because it generally means your taxable pay from that job or pension is taxed at the higher rate. But D0 is not necessarily an error. It is often used where someone has multiple sources of income and their Personal Allowance is being used elsewhere.
The best way to prevent this is to check your payslip and identify the codes applied. And, if you see the take-home pay is considerably lower without any reason, seek help to avoid potential PAYE errors.
Disclaimer: This article intends to provide general information on What Is the Do Tax Code? and How Impact Your Earnings?.