What Does the OT Tax Code Mean?|UK, England, Scotland and Wales

What Does the OT Tax Code Mean?

HMRC uses the OT tax code in the UK for various situations where an individual’s tax allowances are restricted or not applied. This code means you will be taxed at the basic, higher, or additional tax rate on all income without any personal allowance deductions. The OT code is most commonly assigned when HMRC lacks sufficient information about your tax situation or in cases where you’ve reached your annual tax-free allowance threshold.

When using the OT code, you may be taxed as though you have no allowances, which can lead to higher deductions. It’s critical to understand why this code has been applied and whether it’s a temporary or a more permanent measure.

Why Do I Have the Tax Code OT?

There are several reasons why you might have the OT tax code. Here are some common scenarios where HMRC assigns the OT code:

1. Starting a New Job Mid-Year: If you change jobs or start a new position without a P45 from your previous employer, your new employer may apply the OT tax code.
2. Income Exceeding the Personal Allowance: If you’ve already used up your entire personal allowance for the tax year, the OT tax code may apply, taxing all further income at the basic, higher, or additional rate, depending on your total earnings.
3. Multiple Jobs or Pensions: If you have more than one job or receive income from multiple pensions, the OT code may be applied to ensure you’re not receiving personal allowances multiple times.
4. Tax Compliance Checks: Sometimes, HMRC will apply the OT code temporarily if they are awaiting updated income or tax information from you or your employer.

What is the Difference Between OT and BR Tax Codes?

The OT and BR tax codes are both emergency tax codes used by HMRC to ensure tax is collected, but they function differently and apply in distinct situations.

OT Tax Code: The OT tax code is typically assigned when HMRC has limited information about a taxpayer’s allowances or income sources, such as when a personal allowance cannot be used. The OT code taxes all income at the basic, higher, or additional rates based on the taxpayer’s income bracket without taking personal allowances into account. This code is often applied on a non-cumulative basis, meaning each pay period is taxed independently without adjusting for previous earnings or deductions.

BR Tax Code: The BR (Basic Rate) tax code is applied when HMRC needs to ensure that all income is taxed at the basic rate of 20%, commonly for individuals with a second income source, like a second job or pension. Unlike OT, the BR code allows personal allowances to apply to the primary income source, with any secondary income fully taxed at the basic rate without affecting personal allowances.

The OT code can result in higher tax deductions compared to the BR code, as the OT code may apply higher rates (40% or 45%) based on total income, whereas BR only applies the 20% basic rate.

How Much Income Tax Do I Pay with an OT Tax Code?

The tax you pay under the OT tax code will depend on your total annual income and which tax band you fall into. Here’s a breakdown of how it works:

1. Basic Rate (20%): If your income falls into the basic tax band, any earnings taxed under OT will be taxed at 20%.
2. Higher Rate (40%): For incomes in the higher rate band, the OT code will lead to a 40% tax on that income.
3. Additional Rate (45%): If you’re in the additional rate band, earnings under OT will be taxed at 45%.

Since the OT code excludes any personal allowances, all earnings are taxed from the first pound. This could mean paying more tax than you would under a standard code.

Do I Get a Rebate Under the OT Code?

If you’ve been overtaxed due to an OT tax code, you might be eligible for a tax rebate. Tax rebates occur when HMRC determines that you’ve paid more tax than required, often after a review of your actual income and circumstances.

To initiate a rebate, contact HMRC or use your tax account online to check your tax status. HMRC will assess whether an overpayment has occurred and issue a refund if applicable.

How Do I Change My OT Tax Code?

If you believe the OT code was assigned in error, or if your circumstances have changed, you can request an update to your tax code. Here’s how:

1. Contact HMRC: Call HMRC directly or update your details through your online personal tax account. Explain your situation and provide any necessary information, like your employment status or additional income sources.
2. Update with Your Employer: Ensure your employer has the correct details, especially if you’ve recently changed jobs or started a second income source.
3. Submit Relevant Documents: If you have received a P45 from a previous job, provide it to your new employer. A P45 will usually contain essential tax information that helps HMRC and your employer determine the appropriate code.

How the OT Tax Code Affects Your Income Tax?

The OT tax code can result in significantly higher tax deductions, especially for higher earners. Since no allowances are applied, any income received under the OT code is taxed at the applicable rate for your income level. This tax treatment ensures that individuals with the OT code pay tax on every pound they earn, which can impact disposable income.

Example of OT Tax Code Calculation

If your income falls into the higher tax rate, you’ll pay 40% on all earnings under the OT code. For example, if you earn £1,000 under this code, £400 would be deducted for tax purposes.

What are the current income tax rates in the UK?

As of the 2024 tax year, the UK income tax rates for England, Wales, and Northern Ireland are structured as follows:

• Personal Allowance: Up to £12,570 – 0% tax rate.
• Basic Rate: £12,571 to £50,270 – 20% tax rate.
• Higher Rate: £50,271 to £125,140 – 40% tax rate.
• Additional Rate: Over £125,140 – 45% tax rate.

It’s important to note that the Personal Allowance decreases by £1 for every £2 earned above £100,000, effectively reducing it to zero for incomes over £125,140.

For residents of Scotland, income tax rates differ:

• Starter Rate: £12,571 to £14,732 – 19% tax rate.
• Basic Rate: £14,733 to £25,688 – 20% tax rate.
• Intermediate Rate: £25,689 to £43,662 – 21% tax rate.
• Higher Rate: £43,663 to £125,140 – 42% tax rate.
• Top Rate: Over £125,140 – 47% tax rate.

These rates apply to non-savings and non-dividend income, such as earnings from employment, self-employment, pensions, and property

What are the Regional Differences in Tax Rates across the UK?

In the United Kingdom, income tax rates and thresholds vary across its constituent countries due to devolved powers granted to Scotland and Wales. Here’s an overview of the regional differences for the tax year 2024/25:

England, Wales, and Northern Ireland:

• Personal Allowance: £12,570 (tax-free income).
• Basic Rate: 20% on income from £12,571 to £50,270.
• Higher Rate: 40% on income from £50,271 to £125,140.
• Additional Rate: 45% on income over £125,140.

Scotland:

• Personal Allowance: £12,570 (tax-free income).
• Starter Rate: 19% on income from £12,571 to £14,876.
• Basic Rate: 20% on income from £14,877 to £26,561.
• Intermediate Rate: 21% on income from £26,562 to £43,662.
• Higher Rate: 42% on income from £43,663 to £75,000.
• Advanced Rate: 45% on income from £75,001 to £125,140.
• Top Rate: 48% on income over £125,140.

These differences mean that taxpayers in Scotland may pay more or less income tax compared to those in other parts of the UK, depending on their income level. For instance, higher earners in Scotland.

Conclusion

The OT tax code can lead to higher tax deductions due to its restriction on personal allowances. Applied in various situations, including new employment and multiple income streams, it ensures income is taxed at the appropriate rate. While it may be necessary for certain circumstances, you can take steps to review and adjust your tax code if needed.

The OT tax code is used by HMRC in specific circumstances, such as when a taxpayer has no available personal allowance or when employment details are incomplete. This tax code often results in income being taxed at the basic, higher, or additional rates without accounting for the personal allowance, leading many to inquire about the OT tax code refund process.