Tax Codes Explained | What Your Tax Code Means? (2024)

Most adults in the UK don’t complete a tax return. Income, typically a salary from employment is taxed at source known as pay as you earn (PAYE).

To enable the employer to deduct the correct amount of income tax (i.e PAYE) a tax coding notice is issued. These are issued by HMRC to the employer and employee.

The tax system in the UK, should ensure that the correct amount of tax is deducted and already paid. Hence, why there is no automatic requirement to complete an end of year UK tax return.

A tax code is a combination of numbers and letters.

Typically, there would be up to 4 numbers. The most popular number in the current tax year is 1257.

The most popular letters are L, M, N, T, BR, D and K.

We will go through each of these in more detail later. Including the most popular combinations such as 1257L, BR, D0, 0T and many more.

Tax codes are issued on employment and pension income. As a result both employees and pensioners will receive at least one code.

HMRC issue the code to the employer usually via software. The employer applies the code, which will then show on the employees pay slip.

Coding notices are typically issued between January and March each year. They are then applied to the income for the following tax year which starts 6^th April.

For example HMRC, may issue you with a new code in February 2023, which will apply from 6^th April 2023 to 5^th April 2024. Changes to the code can be issued by HMRC at any point.

Each employment or pension income will have their own coding notice. You will only have one code per source of income.

For example, say you have 2 employments and 2 private pensions. As each has its own code you will have 4 tax codes.

Every individual starts with a personal allowance, which is your tax free earnings amount. In the current tax year 2023/24 the tax free amount is £12,570.

The numbers on the code refer to how much tax free income can be received. HMRC drop the last digit when applying it to the tax code.

As a result the most popular code for an individual with only one income source is 1257L.

Receiving taxable employment benefits will reduce your personal allowance. As a result, the number on your code will also reduce.

For example medical insurance of say £400 paid by an employer, would reduce your tax free amount down to £12,170. This is based on the personal allowance of £12,570 in tax year 2023/24.

A tax free allowance of £12,170 would result in a tax code of 1217L being issued.

Claiming tax deductible expenses will increase your personal allowance. This will result in an increase to the number on your code.

For example claiming approved subscriptions of say £250, would increase your tax free amount to £12,820. This is based on the personal allowance of £12,570 in tax year 2023/24.

A tax code 1282L would be issued.

We stated earlier that everyone starts with a personal allowance. The letter part of the code alters this allowance and is personal to your circ*mstances.

The letter L is what most taxpayers will see. It means you are entitled to the personal allowance, which in the current 2023/24 tax year is £12,570.

See further detail on tax code 1257L, including how much tax you will pay.

The letter M means you’ve received 10% of your partner’s personal allowance.

The letter N means you’ve transferred 10% of your allowance to your partner.

In both cases it means that the marriage allowance has been claimed. This allows you to transfer 10% of your personal allowance and save tax.

See further detail on the marriage allowance and whether you can claim up to £1,240 in tax.

The letters BR, D0 and D1 mean that no personal allowance is being received on this income. They are usually applied when you have more than one job or pension.

BR stands for Basic Rate and it means that all of your income from this job or pension is taxed at 20%. See further detail on a BR Tax Code.

D0 means that all of your income from this job or pension is taxed at the higher rate, which is 40%. See further detail on a D0 Tax Code.

D1 means that all of your income from this job or pension is taxed at the additional rate, which is 45%. See further detail on a D1 Tax Code.

The code 0T is issued either when your personal allowance has been used up or if your new employer is missing information.

See further detail on a 0T Tax Code.

We explained earlier that the most common code was 1257L and that if you received benefits it would reduce this number. In the example we gave the company provided medical insurance resulted in a 1217L tax code.

Assuming there are further taxable benefits, the code would be even smaller and smaller until it couldn’t reduce any further.

Codes which start with a K are issued when total benefits exceed the tax free allowance. A company car benefit is one such example where this is possible.

Another reason a K code may be issued is if you owed tax from a previous year.

There are a few other letters that you may see on your coding notice. These include:

T – This means your tax code has other calculations to work out your personal allowance

NT – This means that no tax is payable on this income

W1, M1 or X – These are emergency codes. They are temporary and are usually applied when starting a new job

The codes and tax rates stated throughout are relevant to England only.

In Scotland the codes will be similar but they’ll also include the letter S to indicate that Scottish tax rates are applied. For example SBR means Scottish Basic Rate.

The same applies to Wales. The additional letter for Wales is the letter C and this indicates that Welsh tax rates are applied. For example CBR means Welsh Basic Rate.

An incorrect code means that the incorrect tax is being taken. You are either paying too much tax or too little tax, neither situation is desirable so the sooner you act the better.

HMRC issue tax codes. Therefore, it is only HMRC that can correct your code.

You will need to provide HMRC with your current income details, which will enable them to reassess the codes issued.

This can be done online using HMRCs check your income tool.

Alternatively you can contact HMRC on 0300 200 3300 and confirm your income details over the phone.