What is the Tax Code ‘BR’?

The tax code BR is usually used when your employer doesn’t have the full details to give you your correct tax code, and it means that all of your income will be taxed at the Basic Rate (BR) of 20%.

This means that you will be taxed at the Basic Rate of tax from the first £1 you earn from that employer. You might be thinking that given you are actually a Basic Rate taxpayer, that this tax code might be correct. However, for the vast majority of people on a BR tax code, this is not right and it is something that you should fix with your employer as soon as possible.

Is a BR Tax Code Correct?

One of the major reasons why a BR tax code is generally incorrect, is that it doesn’t take into account your Personal Allowance. This is the amount of money you can earn before you pay income tax at all. Currently, the Personal Allowance is £12,570 per year.

This means that you pay a 0% rate of tax on the first £12,570 that you earn from your job. If you are on a Basic Rate tax code, this tax free allowance won’t be taken into account and you may pay more tax than you should.

To explain this in a bit more detail, let’s have a brief look at how your income tax is calculated.

How Does Income Tax Work?

Income tax is calculated on a system of bands. It's important to keep in mind that you only pay the set rate of tax for income that falls within each band. So if you go £1 into the Higher Rate tax band, you only pay Higher Rate tax on that £1, not the rest of your income. Here is a summary of the tax bands in the UK:

• Your Personal Allowance makes up the first band of the income tax system, and means that you pay 0% tax on anything you earn up to £12,570 per year. 

• The next band is the Basic Rate tax band which goes from £12,571 up to £50,270. This band is taxed at 20%. 

• Income from £50,271 to £150,000 is known as the Higher Rate tax band, and this band is taxed at 40%

• Any income above £150,000 is known as the Additional Rate tax band and attracts a tax of 45%.

What to Do if You’re on a BR Tax Code

So for people who have a single source of income, a BR tax code is likely to be incorrect. This will mean that you’re paying more tax than you should. If you’re in this situation, there are some steps you need to take in order to fix it for future pay cycles.

Tell Your Employer

The first thing you need to do is speak to your employer. This could be the HR department or Payroll, or it could just be your manager depending on how big the company you work for is. You need to make them aware that you are on a BR tax code, and that you believe this may be incorrect.

They will be able to ask you for any missing information that they need to get you on the right tax code, and ensure it is fixed up for the next pay cycle. 

Ensure Overpaid Tax is Refunded

Generally any overpaid tax can be refunded through your salary with an adjustment to your tax code. Again, it’s important that you speak to your employer about how long this issue has been going on for, and the estimated overpaid tax is equalised.

If you have been on the incorrect tax code for a long time, you can claim back a refund for the 4 previous tax years as well. This is well worth doing as it could add up to hundreds or even thousands of pounds. If you believe you are owed a tax refund for previous years, you should contact HMRC and inform them of the issue. They’ll be able to tell you the best way to arrange a refund in your circumstances.

When Might a BR Tax Code Be Correct

There are some circumstances when using a BR tax code may be correct. For example, if you have more than one job or source of income, you may be using your Personal Allowance already.

To illustrate, imagine that you had 1 job that was paying you £15,000 per year, and another one that was paying you £20,000 per year. Only one of these employers will be able to use your Personal Allowance, otherwise you will end up under paying HMRC and will owe them a big tax bill at the end of the year.

In this instance, you might opt to have 1 employer use a standard tax code, and the second employer use a BR tax code as all of the income falls within the basic rate. As mentioned before, the best way to ensure this is done properly is to explain your situation to whoever manages your pay. It’s their job to make sure all of this is done correctly.

Summary

A BR tax code means that all of your income from that employer is being taxed at 20%. Even if you are a Basic Rate taxpayer, this is potentially incorrect as it means that your Personal Allowance isn’t being taken into account. This could mean that you’re paying more tax than you should be.

If you think you might be on the wrong tax code, the best way to get it fixed is to speak to your HR or Payroll department. They can review your information and get you on the right tax code going forward. It’s really important to get this right, because managing the amount of tax you pay is one of the most important aspects to growing your wealth over the long term.