Understanding Your Tax Code

Your tax code determines how much income tax comes out of your salary or pension each month. Understanding what your code means can help you spot errors and avoid overpaying tax. This article explains how tax codes work, what to check on your payslip, and what to do if something looks wrong.

What is a tax code?

Your tax code is used by your employer or pension provider to work out how much income tax to deduct from your pay or pension. HMRC tells them which code to use. You'll get a separate tax code for each employment or pension you have.

The most common tax code is 1257L, which applies to most people who have one job or pension.

Where to find your tax code

You can find your tax code in several places:

• On your payslip
• On a 'Tax Code Notice' letter from HMRC
• By checking your tax code online through your Personal Tax Account (you'll need to sign in or create an account)
• On the HMRC app

If you check online or through the app, you can also view tax codes from previous tax years and sign up for email notifications when your tax code changes.

How tax codes work

Your tax code is made up of numbers and letters. Each part tells your employer something different about your tax situation.

The numbers

The numbers in your tax code show how much tax-free income you can earn in that tax year before you start paying tax.

HMRC starts with your Personal Allowance (the amount you can earn tax-free) and then adjusts it by:

• Taking off any income you haven't paid tax on (such as untaxed interest or part-time earnings)
• Taking off other deductions (such as company benefits or the High Income Child Benefit Charge)

The final digit is then replaced with a letter.

Example: If you're entitled to the standard Personal Allowance of £12,570 but you also receive medical insurance worth £1,570 from your employer, HMRC takes the £1,570 away from your Personal Allowance. This leaves you with £11,000 of tax-free income, giving you a tax code of 1100L.

The letters

The letter in your tax code describes your situation and how it affects your Personal Allowance. Here are the most common ones:

L – You're entitled to the standard tax-free Personal Allowance

M – You've received a transfer of 10% of your partner's Personal Allowance through Marriage Allowance

N – You've transferred 10% of your Personal Allowance to your partner

T – Your tax code includes other calculations to work out your Personal Allowance

S – Your income or pension is taxed using the rates in Scotland

C – Your income or pension is taxed using the rates in Wales

NT – You're not paying any tax on this income

K – You have income that you're not paying tax on which is more than your Personal Allowance

Emergency tax codes

If you start a new job and your employer doesn't have details of your previous income, you may be put on an emergency tax code. Common emergency codes include:

• 0T – Your Personal Allowance has been used up, or you've started a new job and your employer doesn't have the details they need
• Codes ending in W1, M1 or NONCUM

Emergency tax codes can mean you pay too much tax initially. This is usually corrected once HMRC receives the right information.

Tax codes for multiple jobs or pensions

If you have more than one job or pension, you might see these codes on your second source of income:

BR – All income from this job or pension is taxed at the basic rate

D0 – All income is taxed at the higher rate

D1 – All income is taxed at the additional rate

Similar codes exist for Scotland (SBR, SD0, SD1, SD2, SD3) and Wales (CBR, CD0, CD1).

Why your tax code might change

HMRC will change your tax code if you need to pay a different amount of tax. This happens when your income or circumstances change, such as:

• You start a new job
• You get taxable state benefits
• You start receiving income from an additional job or pension
• The interest on your savings exceeds your Personal Savings Allowance
• Your weekly State Pension amount changes
• Your employer tells HMRC you've started or stopped getting benefits from your job (such as a company car or private medical insurance)
• You claim Marriage Allowance
• You claim expenses that you get tax relief on
• You're paying the High Income Child Benefit Charge through your wages or pension
• You need to pay back the Winter Fuel Payment or Pension Age Winter Heating Payment
• You've been on the wrong tax code and owe tax

If your tax code changes, you can check your Personal Tax Account online to find out why.

What to do if your tax code seems wrong

If you started a new job without a P45 from your previous employer, your new employer should have asked you to complete a starter checklist. If you didn't fill this in or completed it incorrectly, you may have been given a BR or 0T tax code by mistake.

If HMRC identifies that you've been given the wrong code, they'll send a corrected tax code to your employer. Check your payslip to see when the new code is applied.

Speak to your employer if the change hasn't been applied by:

• Your next pay day, if you're paid monthly
• Your third pay day, if you're paid weekly

You can also use the online checker tool to see what your tax code means, how much tax you'll pay, and whether you need to update your records.

If you've overpaid tax

If you've been on the wrong tax code and overpaid tax, your new tax code will ensure overpayments are refunded through your pay in certain situations:

• You haven't been employed and haven't received certain state benefits (listed in Statement C of the starter checklist) in the current tax year
• You selected Statement C in error and HMRC has received information from your previous employer

If your previous employer doesn't confirm you've left, HMRC will tell you about any tax overpayment after the current tax year ends.

Sources

• Tax codes
• Changes to your tax code when you start a new job
• Check what your tax code means

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.