At the best of times, tax can be tricky to get your head round – whether it’s the self-assessment, business expenses or the many UK tax codes, each of which have different implications.
So, getting right to it – and to provide you with the information you’re likely looking for – here it is, a simple guide to UK tax codes, to help you understand what yours means.
What Is a Tax Code?
A tax code is a combination of numbers and letters given to you to show HMRC how much Income Tax and National Insurance you should be paying.
A tax code shows the amount of tax-free income an employee should receive in a single tax year also known as their personal allowance. Anything earned above this amount is taxable.
Who Receives a Tax Code?
Anyone employed or paid via PAYE will be given a tax code by their employer via HMRC, which will be shown on their payslip. In contrast, sole traders don’t have a tax code because they don’t pay themselves through PAYE.
What should my tax code be?
It’s tricky to answer the question of ‘what should my tax code be?’ for everyone, because it’s personal to them. As mentioned in this guide, your tax code hinges on your personal allowance, income from another job, any taxable benefits, money you may owe from previous years, as well as other things.
HMRC will normally issue a tax coding notice to you annually, if you qualify for one, and this has accompanying pages which will explain why yours may be different to the standard tax code for the year in question.
If you don’t receive a tax code notice, another way of finding out what your tax code should be is on the government website – but bear in mind that you can only use this tool if you’re employed (paid via PAYE). MoneySavingExpert also has a useful tax code calculator, which may steer you in the right direction.
If you don’t believe that you are on the correct tax code, perhaps HMRC is still including taxable benefits from previous years that you no longer receive, then you should contact HMRC directly to discuss, and ask for an amended code to be issued.
At the end of the day, the key thing to remember is that if you’re working on the wrong tax code you might be paying too much or not enough tax. So either way, it’s something you want to get sorted ASAP.
A List of Tax Codes and what they mean
There are a number of UK tax codes, each of which mean something different. Here they are at a glance:
- L: You’re entitled to the standard tax-free Personal Allowance (£12,570 for 2021/22)
- M: You’ve received 10% of your partner’s Personal Allowance
- N: You’ve transferred 10% of your Personal Allowance to your partner
- T: Your tax code includes other calculations to determine your Personal Allowance
- 0T: Your Personal Allowance has been used or you’ve started a new job and your employer doesn’t have the details they need
- BR: All income from this job is taxed at the basic rate of Income Tax (20%)
- D0: All income from this job is taxed at the higher rate of Income Tax (40%)
- D1: All income from this job is taxed at the additional rate of Income Tax (45%)
- NT: You’re not paying any tax on this income
- S: Your tax is based on rates in Scotland
- C: Your tax is based on rates in Wales
K Tax Code Explained
If you have a K tax code, it means your tax deductions already owed to HMRC from previous years are greater than your Personal Allowance. This can happen for a number of reasons, but most commonly it’s because you receive a benefit from your employer, like a company car, which impacts your Personal Allowance.
What does the Tax Code Number mean?
As you might have noticed, the letter in your tax code is preceded by a number. So what does this mean? Well, usually the number in the tax code can be multiplied by 10 to show the total amount of income an employee can earn before being subject to tax. For example, if your tax code is 1257L, you can earn £12,570 before tax applies.
Emergency Tax Codes
Construction workers and tradespeople are sometimes placed on an emergency tax code. This is a temporary tax status given to employees until HMRC works out which tax code applies. Here are some reasons why you might be placed on emergency tax:
- You’ve started a new job and haven’t got your P45 from your old employer
- You’re starting your very first job
- You’ve become an employee (and are now paid via PAYE) after being self-employed
- You get company benefits (like a van or car)
- You receive the state pension
If you’ve been placed on emergency tax by your employer, your tax code will in most cases be one of the following:
- 1257 W1
- 1257 M1
- 1257 X
For more on emergency tax codes and what to do if you’ve been placed on one, please take a look at our guide to emergency tax.
Common UK Tax Codes
Tax Code 1250L
For employees with one job, the most common tax code in 2020/21 was 1250L. 1250 is based on the Personal Allowance for 2020/21 (£12,500) and L stands for the standard Personal Allowance.
Tax Code 1257L
However, for the 2021/22 tax year, in most cases, an employee’s tax code is 1257L, given the Personal Allowance was increased to £12,570.
Tax Codes 1256L or 1283L
You might find that your tax code isn’t in line with the standard Personal Allowance, whether it’s 1256L or 1283L. This will be because the taxman has granted you tax relief – effectively increasing your Personal Allowance – to account for expenses incurred when you do your job.
While these flat-rate tax reliefs are useful, given they allow you to earn more before tax is due, they might not match your actual expenses. As a result, you may be due a tax rebate.
How are Tax Codes Worked out?
HMRC takes several factors into consideration, including:
- The Personal Allowance you’re entitled to for that tax year
- Income from another job
- An estimate of other non taxable income over £1,000 that HMRC expects you to earn
- Taxable benefits received (e.g. company car)
- Whether you’re due a tax refund or owe tax from previous years
What To Do If You’re Placed On The Wrong Tax Code
Whether you’re on an emergency tax code or one that you suspect is incorrect, you might well have overpaid tax and therefore be due a tax refund.
Calculate your Tax Rebate Today
To find out more, calculate your tax rebate using our tax rebate calculator.
