Most of us have been guilty of getting our payslips and not paying them too much attention (as long as our wages come in!), but there is some important information on those slips that is worth paying attention to. In particular, your tax code can tell you a lot about your tax status.
A tax code is a string of numbers and letters that is used by an employer (or pension provider) to calculate how much income tax to deduct from an employee’s pay (or pension).
HMRC will tell the employer what tax code to use, and in turn, the tax code tells the employer how much an employee can earn tax-free within a given pay period.
What your tax code means
Your tax code can certainly look confusing! What does that string of letters and numbers mean? Well, it’s actually fairly straight forward. For most people in the UK, 1275L is the most common tax code, as this is the tax code for people with only one job. The 1275 refers to the tax free amount an employee can earn within a year, and the letter ‘L’ indicates you are under 65 and receive the basic personal allowance, which is £12,750 for 24/25. Let’s look at this in a bit more detail:
What do the numbers mean?
The numbers in your tax code are referring to how much money you may earn within a year before paying tax. Most people in the UK are entitled to a personal allowance, which is currently set at £12,750 (and has been since 21/22). Your tax code uses this figure but drops the last digit, hence the number 1275.
This number can change if, for example, you are entitled to tax relief on employment expenses, or if you receive company benefits such as medical insurance, the value of which is deducted from your personal allowance.
What do the letters mean?
The letters add a little more confusion, but to put it simply, they are used by HMRC to communicate a person’s personal circumstances that may affect their tax status (for example, if you’re entitled to marriage allowance).
The letters used by HMRC are;
| Letter | What it means |
| L | You’re entitled to the standard tax-free Personal Allowance |
| M | Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal Allowance |
| N | Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner |
| T | Your tax code includes other calculations to work out your Personal Allowance |
| OT | Your Personal Allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code |
| BR | All your income from this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension) |
| D0 | All your income from this job or pension is taxed at the higher rate (usually used if you’ve got more than one job or pension) |
| D1 | All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension) |
| NT | You’re not paying any tax on this income |
| S | Your income or pension is taxed using the rates in Scotland |
| S0T | Your Personal Allowance (Scotland) has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code |
| SBR | All your income from this job or pension is taxed at the basic rate in Scotland (usually used if you’ve got more than one job or pension) |
| SD0 | All your income from this job or pension is taxed at the intermediate rate in Scotland (usually used if you’ve got more than one job or pension) |
| SD1 | All your income from this job or pension is taxed at the higher rate in Scotland (usually used if you’ve got more than one job or pension) |
| SD2 | All your income from this job or pension is taxed at the advanced rate in Scotland (usually used if you’ve got more than one job or pension) |
| SD3 | All your income from this job or pension is taxed at the top rate in Scotland (usually used if you’ve got more than one job or pension) |
| C | Your income or pension is taxed using the rates in Wales |
| C0T | Your Personal Allowance (Wales) has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code |
| CBR | All your income from this job or pension is taxed at the basic rate in Wales (usually used if you’ve got more than one job or pension) |
| CD0 | All your income from this job or pension is taxed at the higher rate in Wales (usually used if you’ve got more than one job or pension) |
| CD1 | All your income from this job or pension is taxed at the additional rate in Wales (usually used if you’ve got more than one job or pension) |
Occasionally, you may see the letter ‘K’ before the numbers. This means that the employee has income that hasn’t been taxed but is worth more than their personal allowance. They may own tax from a previous year, or be receiving benefits that they owe tax on.
Tax codes for employers
As an employer, it is your responsibility to put an employee’s tax code into your payroll software to work out how much tax to deduct from their pay throughout the year.
Tax codes are especially important if you are using the Pay As You Earn (PAYE) system, as it allows you to deduct tax and National Insurance contributions (NICs) directly from your employee’s earnings.
Employers will be notified of employee tax codes in one of three ways;
- From a current P45
- By direct notification from HMRC
- By completing a new starter checklist
You usually need to update your employee’s tax code at the start of a new tax year. If the tax code changes during the year, HM Revenue and Customs (HMRC) will email you – you should update your payroll records as soon as possible.
Tax codes for employees
Although it might not seem overly exciting, as an employee, it is important that you understand your tax code. Changes to your circumstances may result in a change in your tax code, which in turn can lead to you paying too much or too little tax. Things you should be aware of that might change your tax code include;
You’ve started a new job but didn’t have a P45 (In which case, you’ll likely be put on an emergency tax code)
You are receiving additional income and therefore are using some of your tax-free allowance
Changes to income – you’ve had a pay rise (yay!) or cut (boo!) which affects your earnings
You receive a bonus or employee benefit
You are receiving some form of taxable state benefit
Emergency tax codes
An emergency tax code is typically used when an employer doesn’t know enough detail about an employee’s income to correctly assign a tax code. This commonly happens when a new employee isn’t able to provide a P45 from their previous employer.
You may also see emergency tax codes used if the employee is moving from self-employment to PAYE, or if they start to receive a taxable benefit or additional income.
Normally, once HMRC has enough information, they will send the correct tax code to the employer and employee.
Tax codes for the self-employed
If you are self employed or a sole trader then you won’t have a tax code. This is because the tax code is used by HMRC to tell employers how much tax needs to be deducted from an employee’s wages. As a sole trader, you will complete a self-assessment to calculate your tax.
How to update your tax code
For most people, you won’t need to update your tax code. As long as HMRC has the correct info, they should automatically update your tax code for you.
If you do think your tax code is wrong however, you can use the HMRC Check your Income Tax online service to:
- update your employment details
- tell HMRC about a change in income that may have affected your tax code
For example, you can:
- add company benefits
- add missing employers or income
- claim employment expenses
- update your estimated taxable income
HMRC may change your tax code as a result of the updates you make in the online service.