Understanding UK Tax Codes: A Simple Guide
Posted on 10th January 2025
A tax code is a series of letters and numbers used by your employer or pension provider to work out how much tax to deduct from your income.
In the UK, most people will see a code like 1257L. The number (e.g., 1257) represents your annual tax-free allowance (£12,570 in this case), divided by 10. The letter provides information about your circumstances (e.g., "L" means you’re entitled to the basic tax-free allowance).
Why Checking Your Tax Code Matters
Mistakes in your tax code could mean you're paying too much tax—or not enough, which might result in a surprise bill later. It's important to ensure your tax code matches your situation, especially if:
You’ve changed jobs.
You have multiple sources of income (e.g., a second job or pension).
Your circumstances have changed (e.g., starting benefits or losing allowances).
How to Check Your Tax Code
Look at your payslip—it will show your tax code near the income or deductions section.
Use the HMRC online tax account to confirm the code is correct for your situation.
If something seems off, contact HMRC. They can adjust your code and issue a refund if you've overpaid.
Monthly Income Check
Make a habit of reviewing your payslip each month:
Compare your gross income (before tax) to your expected pay.
Check the tax deducted matches your tax code.
Taking a few minutes to review your tax code and income ensures you're paying the right amount and avoids future surprises!
What the letters mean
Now to the main event. The letters in an employee’s tax code refer to their situation and how it affects their Personal Allowance.
Code
0T
What is it?
The code is typically used when a person's tax-free personal allowance has been used up, or they have started a new job. This may be because their new employer dosen't have enough information to assign the correct tax code.
This code includes no Personal Allowance, meaning all their income is taxed.
It can also be what is known as an Emergency Tax, applied temporarily until the correct code is determined.
Full Rate Taxation - The income is taxed at full rate (20% for basic, 40% for higher and 45% for additional.)
When is this code usually used.
When you start a new job and have not provided a P45 from your previous employers.
Your tax affairs are complex or under review.
You have other sources of income that may affect your tax code.
BR
This code stands for "Basic Rate".
No Personal Allowance - Income is taxed at the basic rate of 20%, without applying this allowance.
Secondary Income - Second jobs or pensions, where the full personal allowance is allocated to the primary income source.
Fixed Rate Taxation - All income under this code is taxed at 20%, regardless of how much you earn.
Second Job - if you have more than one job, you may receive a BR code to be applied.
Pensions - If you receive a pension in addition to your main income, the BR code may apply to the pension.
Emergency Code - It can be used temporarily if HMRC doesn’t have full information about your income status.
D0
This tax code is used for all income on the higher rate of 40%, with no personal allowance.
No Personal Allowance - Similar to BR.
Higher Rate Tax - All income is tax at the higher rate of 40%.
Secondary Income - Often used for a second job or additional income (like pensions) when your primary income already uses up your personal allowance & basic rates.
Second Job - If your primary job uses up your personal allowance and basic rate band, the D0 code might apply to your second job to tax all income from it at 40%.
Pensions or Additional Income - If you receive a pension or other secondary income that pushes you into the higher tax bracket, the D0 code may be applied to ensure the correct higher rate of tax is collected.
D1
This tax code is used for all income at the additional rate of 45%, with no personal allowance.
No Personal Allowance - Like the BR and D0 codes, the D1 tax code does not provide any personal allowance.
Additional Rate Tax - All income under this code is taxed at the additional rate of 45%.
Secondary Income or High Earners - This code is typically used for high earners with secondary income or additional jobs.
Second Job for High Earners - If your main job already places you in the additional rate tax band, the D1 code might apply to any second job to ensure all income from it is taxed at 45%.
Pensions or Other Additional Income - If you have other sources of income that are substantial and push you into the additional tax bracket, the D1 code may be used.
L
This tax code is one of the most common tax codes and indicates that an individual is entitled to the standard personal allowance. Here’s what it means:
Personal Allowance - The L code means that the individual receives the standard tax-free personal allowance, which is the amount of income they can earn before paying tax.
Updated Annually - The personal allowance and corresponding tax code are typically updated each tax year by HMRC.
Standard Taxpayers - Most people who are entitled to the standard personal allowance and have no special circumstances will have an L tax code.
Adjustments for Taxable Benefits - If there are no significant adjustments needed for taxable benefits or other income, the L code applies.
Example:
For the tax year 2023/2024, the standard personal allowance is £12,570. Therefore, the tax code might be 1257L, meaning you can earn £12,570 tax-free.
M
This tax code is used for individuals who receive a transfer of 10% of their partner’s personal allowance through the Marriage Allowance.
Marriage Allowance Transfer - The M code indicates that you have received 10% of your partner’s personal allowance. This is typically done when one partner earns less than the personal allowance and transfers a portion of it to the other partner.
Higher Personal Allowance - The individual with the M code benefits from a slightly higher personal allowance, reducing the amount of tax they pay.
Married Couples or Civil Partners - It’s applicable when one partner’s income is below the personal allowance threshold, and they transfer a portion of their allowance to the other partner.
Marriage Allowance - The M code applies to the recipient of the transferred allowance.
Example:
For the tax year 2023/2024, the standard personal allowance is £12,570. If your partner transfers 10% of their allowance (approximately £1,257), your tax code would be 1257 + 125 = 1377M, meaning your personal allowance increases by the transferred amount.
N
This tax code is used for individuals who transfer 10% of their personal allowance to their partner through the Marriage Allowance. Here's what it means:
Marriage Allowance Transfer - The N code indicates that you are transferring 10% of your personal allowance to your partner. This reduces the amount of your personal allowance and, consequently, the tax-free income you can earn.
Lower Personal Allowance - Your personal allowance is reduced by the amount you transfer (about 10% of the standard personal allowance).
Married Couples or Civil Partners - It applies to individuals who have an income below the personal allowance and transfer a portion of their allowance to their partner.
Marriage Allowance - The N code applies to the person transferring their allowance.
Example:
For the tax year 2023/2024, the standard personal allowance is £12,570. If you transfer 10% of this (£1,257) to your partner, your personal allowance would be reduced, and your tax code might be 1257 - 125 = 1133N.
NT
The NT tax code stands for No Tax. This code is used when no tax is to be deducted from an individual's income.
No Tax Deduction - Income is paid without any tax being deducted at source.
Special Circumstances - It is usually applied in specific scenarios where HMRC has determined that no tax should be collected through PAYE (Pay As You Earn).
Repayment Situations - If an employer is repaying expenses or correcting an overpayment of wages, the NT code might be used.
Non-resident Taxpayers - In certain cases where an individual is a non-resident for tax purposes and not subject to UK tax.
Tax Agreement or Exemption - Specific tax agreements or exemptions may result in the NT code being applied.
T
This tax code indicates that a person's tax code includes special circumstances that may require manual adjustment.
Special Adjustments - The T code is used when there are complex tax situations, such as adjustments for benefits, additional income, or other special tax considerations.
No Standard Allowance - It can also indicate that the personal allowance is reduced or restricted due to certain factors, like exceeding the income threshold or having taxable benefits.
Manual Review - The T code often signals that HMRC may need to review the tax code annually to ensure it's correct.
Income Above Personal Allowance Limit - For individuals whose income exceeds the personal allowance limit, leading to adjustments in the allowance.
Taxable Benefits - When certain taxable benefits or expenses need to be accounted for.
Complex Tax Situations - Cases that require HMRC to apply specific rules or manual adjustments.
If your employee’s tax code has ‘W1’ or ‘M1’ at the end
W1 (week 1) and M1 (month 1) are emergency tax codes and appear at the end of an employee’s tax code, for example ‘577L W1’ or ‘577L M1’. Calculate your employee’s tax only on what they are paid in the current pay period, not the whole year.
Tax codes with the letter ‘K’
The letter K is used in an employee’s tax code when deductions due for company benefits, state pension or tax owed from previous years are greater than their Personal Allowance.
Multiply the number in their tax code by 10 to show how much should be added to their taxable income before deductions are calculated.
Example
An employee with tax code K475 and a salary of £27,000 has taxable income of £31,750 (£27,000 plus £4,750).
The tax deduction for each pay period cannot be more than half an employee’s pre-tax pay or pension.
If you need any tax advice in Milton Keynes give a call to the team at Holmes Accountancy on 01908 315716 or contact us here.
The tax tip is provided for general guidance only; further advice should be sought, for specific issues.
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