How do tax codes work & what do they mean?

Tax codes are confusing enough at the best of times, but they are an important part of your payslip. Being on the wrong tax code could see you paying far too much tax or not enough, meaning you’ll owe HMRC further down the line. So, it’s very important to understand your tax codes…

What are tax codes?

A tax code is a series of numbers and letters that are printed on your payslip. Your tax code tells your employer how much income tax and National Insurance to deduct from your salary. Your tax code also includes your personal allowance (PA), which is the tax-free portion of your income.

HMRC issues your tax code but it’s down to you to check whether it’s correct. It directly impacts your take-home pay so it’s well worth ensuring that you’re paying the right amount of tax.

How are tax codes worked out?

HMRC determines your tax code based on the following information:

  • Your personal allowance
  • Whether you have multiple incomes
  • An estimate of your other non-taxable income (savings interest etc.)
  • Taxable benefits you receive (health insurance etc.)
  • Whether you’re due a tax refund or owe HMRC tax

The start of your tax code is usually numbers which represent your tax-free allowance. For example, a tax code beginning with 1257 means that you have a tax-free allowance of £12,570.

What are the different types of tax codes in the UK?

There are several different UK tax codes, here’s a summary of what they mean:

  • L – you’re entitled to the current tax-free personal allowance (£12,570 for 2022/23)
  • M – you receive 10% of your partner’s personal allowance 
  • N – you transfer 10% of your personal allowance to your partner
  • T – other calculations are used to determine your PA
  • 0T – you’ve used your PA, or your new employer doesn’t have enough tax details
  • BR – all income is taxed at basic rate (20%)
  • D0 – all income is taxed at higher rate (40%)
  • D1 – all income is taxed at additional rate (45%)
  • NT – you’re not taxed on this income
  • S – tax is Scottish rates
  • C – tax is Welsh rates 

Can tax codes change?

Yes, your tax code can change for any of the following reasons:

  • Yearly to reflect personal allowance changes
  • HMRC receives more information from your employer about the benefits you receive
  • HMRC calculates that you’ve over or underpaid tax for the previous year 
  • You’ve been on an emergency tax code at a new job and your tax code is now updated
  • You’ve given HMRC new information that changes your tax code

What is an emergency tax code?

An emergency tax code is a temporary code that HMRC issues when they don’t have enough information to calculate your tax code. This usually happens in the following circumstances:

  • You’ve recently started a new job and haven’t got a P45 from your old employer
  • You’re starting your first job so have no tax information 
  • You’re now an employee after being self-employed
  • You receive company benefits
  • You receive the state pension

Emergency tax codes are generally the following:

  • 1257 W1
  • 1257 M1
  • 1257 X

Emergency tax codes usually mean that you’re overpaying tax. However, once HMRC has enough information, they’ll update your tax code and refund any overpaid tax.

How can you check your tax code?

The easiest way to check your tax code is to look at your most recent pay slip, it’ll be shown alongside your pay. Your tax code will also be included on your PAYE coding notice (P2), which gets sent out at the start of each tax year. Or on your P60 which gets sent out at the end of the tax year. Your tax code from previous employers can also be found on a P45.

You can check your tax code online using your Government Gateway account where you’ll have to verify your ID to access your tax information.

What can you do if your tax code is wrong?

If you believe that your tax code is incorrect, you can tell HMRC by calling them on 0300 200 3300. Or, log in to your Government Gateway account and notify them online. If you’re currently on an emergency tax code, giving your new employer your P45 from your previous job will help HMRC issue the correct tax code.

If you’ve overpaid tax, HMRC will adjust your tax code accordingly and refund via the PAYE system, so you’ll receive a larger payslip than usual. If the overpaid tax is from the previous year, HMRC will likely send a cheque.

If you’ve underpaid tax, HMRC will change your tax code so that you pay more tax on your earnings. However, if you owe more than £3,000 in underpaid tax, they may send you a tax bill.

You don’t want to receive less money than you’re owed or owe money to HMRC unexpectedly. So, it’s always important to check your tax code at the start of each tax year. If you’ve started a new job, always make sure that you’re on the correct tax code by passing on your P45 from your previous employer. 

Get in touch

Should you have any other queries relating to your tax code, HMRC or payroll queries feel free to contact our tax and payroll experts who will be happy to assist you.

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