Ever heard of tax codes and wondered, “What are tax codes”? Then you are not alone. If you are employed under Pay As You Earn (PAYE) in the UK, you may receive a tax code. Tax codes are combinations of letters and numbers that serve as instructions from HM Revenue and Customs (HMRC).
HMRC sends tax codes to employees to ensure they pay the right amount of tax on their income. Employers also receive this code, telling the payroll team and Human Resources (HR) how much tax should be deducted from the salary.
Let’s discuss these UK tax codes in detail so you can stay compliant and keep your finances on track.
Visit Gov.uk website for more details and a complete list of tax code letters.
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What are Tax Codes in the UK?
Tax codes are the numbers issued by HMRC to dictate how much tax should be paid and deducted from the income. They send tax codes to employers and employees. Additionally, it determines how much tax-free pay you receive and makes sure the right amount of Income Tax is taken out by the employer before your salary reaches your bank account. In the UK, employees should regularly check their tax code. With thresholds remaining fixed, a simple mistake in your code could result in penalties. Now that you know what are tax codes, and how do tax codes work, let’s move forward and discuss who receives the code and why.Who Receives A Tax Code?
Every employee who works under PAYE or receives a pension is given a UK tax code. HMRC sends this code and tells business and pension providers how much of each employee's tax is needed to be deducted from their income. HMRC is responsible for allocating these codes and notifying both employees and employers. An employee receives a paper “Tax Code Notice” (form P2) between January and March. Notifications are sent through the Personal Tax Account or the HMRC app. However, an employer receives these notifications electronically through their PAYE online service or payroll software to ensure an accurate amount of tax is deducted from the next payslip. If you are starting a new job, your previous employer may send you your first tax code through P45 or by completing a starter checklist.What are Tax Codes Examples
There are many tax codes, and the most common and standard tax code is 1257L. This common tax code is for those with only one job. The number 1257 represents £12,570 divided by 10. Moreover, the letter L indicates that an employee is entitled to the standard Personal Allowance with no special adjustments for benefits or underpaid tax. There are other letters too that make tax codes, and learning about them is as crucial as “what are tax codes.”How Do Tax Codes Work in Practice?
Your tax code determines how much of your income is tax-free each pay period. Tax codes reflect your tax-free Personal Allowance and specific individual situations, such as Marriage Allowance or taxable benefits. A typical tax code, such as 1257L, for most employees is calculated as follows:- The number “1257” shows your annual tax-free Personal Allowance of £12,570.
- The letter after the number indicates your tax status. The most common letters for most employees are L, M, N, T, and K.
How Employers Use Tax Codes?
After understanding what are tax codes, it is also crucial to know how employers use them. HMRC sends employers the code notice through the online system, like PAYE online for employers. The system applies the code to your gross pay to determine your taxable pay. Most codes are cumulative. This means the tax-free allowance is spread evenly across the tax year to ensure correct tax payment each month. However, HMRC may put you on an emergency tax code if you start a new job without a P45. You get your Personal Allowance, but it is split into weekly and monthly chunks.What are Tax Codes Letters UK
Some of the most common tax code letters and their meaning are mentioned below: L: This letter is the most common in the tax code that indicates employees are entitled to the standard tax-free Personal Allowance. M: This letter indicates that the employee has received 10% of the spouse’s Personal Allowance through the Marriage Allowance. N: The letter N means the employee has transferred 10% of their Personal Allowance to their partner. T: The “T Tax Code” means that the employee's tax code needs other calculations, such as complex benefits or adjustments for high income. S: This means the employee’s tax is calculated using Scottish tax rules C: This means the employee’s tax is calculated using Welsh tax rules.Common Special Tax Codes and What They Mean
Sometimes, you might see a two-letter tax code that reflects an employee's situation and how it affects their Personal Allowance. These codes often tell employees that they are paying tax at a flat rate or are on a temporary emergency basis.| Letters | Meaning of the letters |
| BR (Basic Rate) | BR (20%) codes are used for second jobs or pensions where your allowance is already used elsewhere. This code means all your income from this job is taxed at the basic rate. |
| D0 (40% rate) | This code means all income from this job or pension is taxed at the higher rate. |
| K (negative Allowance) | This letter means your taxable benefits are more than your Personal Allowance |
| 0T (No Allowance) | 0T tax code means your allowance is used, or your new employer lacks the details they need to assign you a tax code. This can lead to a higher or additional tax rate. |
| NT (No Tax) | No tax is deducted from this income |
| W1, M1, or X (emergency tax codes) | You are on the Emergency tax code |
Emergency Tax Codes
You get an emergency tax code when you provide incorrect or incomplete information. The emergency code ends with W1, M1, or X. If your code ends with one of these codes, you are on an emergency code. Usually, you receive an emergency code when you start a new job without a P45. It means your tax is calculated only on your pay for that specific period, ignoring your previous underpayments or overpayments in the year.How to Find and Check Tax Codes?
You can find your tax codes on your slip or through your Personal Tax Account with HMRC. It can also be printed on your P60 or P45. If you don’t have access to your online account or don't have any of the paperwork, you will need to contact HMRC directly. Before HMRC releases your code, it may ask for your National Insurance (NI) number and several security questions. It is recommended to check the HMRC tax codes regularly, because errors can lead to unexpected tax bills. It is crucial to explore the following places to find your tax code:- Look for “PAYE Code” or “Tax Code” on your payslip
- HMRC app
- P60 or P45
- Personal Tax Account
Why Do Tax Codes Change?
Most people wonder what are tax codes to better understand the tax system, but it's also important to know that they can change, too. When your situation changes, the tax codes change as well. For instance, HMRC may update your tax code if you:- Start a new job and earn income from this additional job or pension
- Start or stop receiving benefits from your job
- Claim Marriage Allowance
- Start receiving taxable state benefits
- Claim expenses that you get tax relief on
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