What are Tax Codes?

Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

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A UK tax code is issued to all employees on Pay As You Earn (PAYE). It is issued by HMRC and tells employers and pension providers how much income tax is 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 they work 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 codes 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 2022-2023 financial year, this is £12,570. However, 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

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

Frequently asked questions about tax codes

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.

What is 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.

My employee says they have been issued the wrong tax code. What do I do?

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.