Tax codes are an important part of the UK government’s taxation system and ensure that everyone who is working pays the right amount of income tax on the money they earn.
What are tax codes?
Tax codes are identifying numbers issued by HMRC to everyone who is employed through Pay As You Earn (PAYE) in the UK to make sure you pay the right amount of tax on your salary. It is up to the employee to check they understand and have the correct tax code to avoid overpaying or being landed with an unforeseen tax bill.
Who receives a tax code?
A UK tax code is issued to all employees on PAYE. It is issued by HMRC and instructs employers and / or pension providers on how much income tax needs to be deducted from each employee’s salary.
A tax code is typically shown on an employee’s payslip, alongside their pay or pension income details. It is also present on other documents supplied by employers such as a P60 at the start of the new financial year or a P45 if they leave. It is also found on the coding notice that is sometimes received from HMRC.
Employees may have more than one tax code if you work in multiple jobs or receive state pension income. Employees’ annual personal allowance is factored into whatever HMRC considers to be an employee’s primary source of income.
Every tax code is made from a combination of letters and numbers. Here, we’ll take a look at some common examples encountered by employers and what they mean.
Examples of tax codes
There are many UK tax codes. However, the most common is 1257L. This is the tax code for employees who have only one job. The number 1257 refers to the amount that employees may earn tax-free each year. For the 2023-2024 financial year, this is £12,570.
L signifies you’re under 65 and receive the basic personal allowance. K is most commonly used if you receive a company benefit like a car while BR stands for basic rate, currently set at 20%. Y is for people over 75 who get the maximum personal allowance. D0 indicates a higher tax rate payer, currently 40%.
Other common examples include:
- 0T - Tax-free allowance has been used up, or the employer does not have enough information to provide a tax code (S0T in Scotland and C0T in Wales)
- NT - No tax is paid on this income
- W1/M1/X - Emergency tax codes
How do you find your tax code?
Your code number will be printed on your payslip or you can find it through your personal tax account with HMRC. It will also be printed on your P60 or P45.
If you don’t have any of that paperwork and no access to your online account you’ll need to contact HMRC directly. You’ll need your national security number and will be asked a number of security questions before they release your code.
List of tax codes and what they mean
- L - Standard tax free personal allowance, under 65
- M - Marriage allowance where you’ve received 10% of your partner’s personal allowance
- N - Marriage allowance where you’ve transferred 10% of your personal allowance to your partner
- T - Tax code includes other calculations to work out pension
- 0T - Personal allowance has been used up, you’ve started a new job or employer doesn’t have details required to issue a tax code
- BR - Income from this job or pension is taxed at basic rate (applicable if you have more than one job or pension)
- D0 - Income from this job or pension is taxed at higher rate (applicable if you have more than one job or pension)
- D1 - Income from this job or pension is taxed at additional rate (applicable if you have more than one job or pension)
- NT - No tax payable on this income
- S - Income taxed using Scotland rates
- S0T - Personal allowance (in Scotland) has been used up, you’ve started a new job or employer doesn’t have details required to issue a tax code
- SBR - Taxed at basic rate in Scotland
- SD0 - Taxed at intermediate rate in Scotland
- SD1 - Taxed at higher rate in Scotland
- SD2 - Taxed at top rate in Scotland
- C - Income or pension taxed at Wales rates
- C0T - Personal allowance (in Wales) has been used up, you’ve started a new job or employer doesn’t have details required to issue a tax code
- CBR - Taxed at basic rate in Wales
- CD0 - Taxed at higher rate in Wales
- CD1 - Taxed at additional rate in Wales
Unravelling tax code numbers
Tax code numbers reveal how much tax-free income employees have in a particular tax year. This is worked out based on their personal allowance and income they haven’t paid tax on such as untaxed interest or part-time earnings.
Understanding tax code letters
Letters refer to an employee’s personal situation and how they affect their tax status such as whether they have used their marriage allowance or whether all their income is taxed at basic rate or higher rate.
Factors affecting tax codes
Tax codes may change under different circumstances such as an increase or decrease in salary, starting or leaving a job, or receiving a benefit from an employer as part of employee remuneration.
Impact of employment benefits on tax codes
An employer will fill out a P11D form at the end of each tax year and submit it to HMRC detailing the benefits an employee has received in addition to their salary. This could be the use of a company car, gym memberships, company mobile phone or health insurance, for example.
K is the code normally issued to account for company benefits. HMRC must issue a notice of coding to show how company benefits have been accounted for.
Influence of tax-deductible expenses on tax codes
If an employee incurs business expenses the employer will usually reimburse those expenses. However, HMRC has to be satisfied that they’re allowable expenses otherwise any reimbursement will be treated as additional taxable income.
Special cases and considerations
Tax codes in Scotland and Wales
Tax codes are different if your business is based in Scotland or Wales. In Scotland employees pay Scottish Income Tax to the Scottish government. The income tax bands are different to those in England. Employees who live in Wales will pay Welsh income tax rates.
Handling incorrect tax codes
If your employee believes that their tax code is wrong, it may be because their employment details have not yet been updated. Employees can update their employment details using the check your Income Tax online service. Once the details have been updated, HMRC will issue them with the correct tax code.
Frequently asked questions about tax codes
Why might an employee’s tax code change?
There are several circumstances under which HMRC may change an employee’s tax code. These include:
When starting a new job without a P45: This will trigger an emergency tax code, as there is not enough information to see how much you’ve earned and how much tax you’ve already paid during the tax year.
Receiving additional income: This may be from an additional job, side hustle or pension that uses up the employee’s tax-free allowance
Changes to income: Pay rises or cuts may affect an employee’s tax liability
Changes to employee benefits: Bonuses or other benefits like company car allowance may affect income and tax liability
Receipt of state benefits: Receiving state pension, widow’s pension, bereavement allowance, incapacity benefit, widowed parent’s allowance or other state benefits alongside your salary may also affect your tax code as these benefits are taxable
Why is my new employee on an emergency tax code?
Employees are commonly placed on an emergency tax code when their employers do not know enough about their income to identify their correct tax code. The most common example of this is when a new employee does not submit their P45 from their previous employer in time for the current round of payroll.
However, emergency tax may also be applied if an employee is transitioning from self-employment to PAYE, or if an employee received additional income like pension income, or a new benefit such as a company car.
As soon as HMRC receives enough information, they will supply the correct tax code to the employer.
Finding the right tax code for self-employment
If you are a self-employed sole trader, you will not have a tax code. A tax code is used by HMRC to instruct employers how much tax needs to be deducted from their wages. When you are self-employed your tax is instead calculated via your self-assessment.
What is tax code 1257L?
1257 refers to the standard personal allowance for 2023/24 of £12,570. This is the amount of tax-free income you can earn before you must pay income tax.
What is the meaning of tax code BR?
BR stands for basic rate. It indicates that income from a job or pension will be taxed at basic rate, currently 20%.