Why you need to keep an eye on your tax code

If you don't know what tax code you're on, you could be losing out; an incorrect tax code is the most common reason for paying too much income tax – especially if you are a higher-rate payer.

Taxpayers need to act now to claim back millions of pounds of overpaid tax, says John Greenwood in The Sunday Times. The time limit for backdating such claims is about to be cut from just under six years to four. The most likely cause of income tax overpayments is an incorrect Inland Revenue tax code, thought to affect one in five of us. You can find your tax code on your monthly payslip, or on the annual coding notification letter sent out by the Inland Revenue. Failing that, ring the self-assessment helpline on 0845 900 0444.

Each code comprises a number followed by a letter. If you ignore the letter and multiply by ten, you get an amount (543L becomes £5,430). With an "L" this represents the total income you can earn in the current fiscal year (6 April 2008 to 5 April 2009) before you pay income tax. For many, this is made up solely of the tax-free personal allowance set by the Government: currently £5,435 for under 65s. Employees receive the benefit in equal monthly sums as a reduction in the income tax collected from salaries.

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