Understanding UK Tax Codes 101
We’ve just come out of self-assessment season *shudders* and so we’ve seen A LOT of questions about tax codes flying around the internet – What are they? What do they mean? Is mine right? What do I do if it’s wrong? So, we thought we’d do an ‘Understanding UK Tax Codes 101’ for you!
Sure, it might not be the most riveting content but it’s important you feel in the know when it comes to your finances. So, we hope by the end of this blog, any tax code-related questions are answered.
Understanding UK Tax Codes 101
What Is a Tax Code? 🤷
A tax code is a combination of letters and numbers that show HMRC how much Income Tax and National Insurance you should be paying.
A tax code also shows your personal allowance (the amount of tax-free income you should receive in a single tax year).
Anything earned above the amount shown through your tax code is taxable.
Who Receives a Tax Code?✉️
Anyone employed or paid via PAYE will be given a tax code by their employer via HMRC.
You can find your tax code on your:
- Payslip.
- By checking online (you will need a Personal Tax Account login for HMRC to do this).
- On the HMRC app (bet you can’t wait to download that!).
- On a ‘Tax Code Notice’ letter from HMRC if you’ve had one.
How are tax codes worked out?🟰
Whilst it may feel like HMRC is putting its finger in the air and seeing which way the wind blows, there is a system for working out your tax code. HMRC takes several factors into consideration, including:
- The Personal Allowance you’re entitled to for that tax year.
- Income from another job.
- An estimate of other non-taxable income over £1,000 that HMRC expects you to earn.
- Taxable benefits received (like a company car).
- Whether you’re due a tax refund or owe tax from previous years.
What should my tax code be?💻
This is a difficult one to answer because it’s personal to you.
As we mentioned above, your tax code is to do with:
- Your personal allowance.
- Your income from another job.
- Any taxable benefits.
- Money you may owe from previous years, etc.
The good news is, HMRC should issue you with a tax code notice each year (if you qualify for one).
This will also explain why your code is what it is.
What if I qualify for a tax code but I haven’t received a ‘Tax Code Notice’?📨
That’s okay. If you don’t receive one, another way of finding out what your tax code is is on the government website.
What if my tax code is wrong?❌
If you think your tax code is wrong, you should contact HMRC who will issue your employer with a revised tax code as required. This can be done by phone (0300 200 3300) or online.
It’s best to sort this out as soon as you suspect there is an issue as you could be paying too much or too little tax.
Tax Code Numbers 101✅
A good hack here is that the number in your tax code can be multiplied by 10 to show the total amount of income you can earn before being subject to tax.
For example, if your tax code is 1257L, you can earn £12,570 before tax applies.
Tax Code Letters 101✅
There are a number of UK tax codes and they all mean something different (which is helpful when you’re trying to get your head around this!)
So, let’s break them down below (We promise it’s not the full alphabet here…)
- L – You’re entitled to the standard tax-free Personal Allowance (£12,570 for 2023/24)
- M – You’ve received 10% of your partner’s Personal Allowance
- N – You’ve transferred 10% of your Personal Allowance to your partner
- T – Your tax code includes other calculations to determine your Personal Allowance
- 0T – Your Personal Allowance has been used or you’ve started a new job and your employer doesn’t have the details they need
- BR – All income from this job is taxed at the basic rate of Income Tax (20%)
- D0 – All income from this job is taxed at the higher rate of Income Tax (40%)
- D1 – All income from this job is taxed at the additional rate of Income Tax (45%)
- NT – You’re not paying any tax on this income
- S – Your tax is based on rates in Scotland
- C – Your tax is based on rates in Wales
- K – Your tax deductions already owed to HMRC from previous years are greater than your Personal Allowance. This can happen for a number of reasons, but most commonly it’s because you receive a benefit from your employer, like a company car, which impacts your Personal Allowance.
But what about Emergency Tax Codes?🆘
An emergency tax code is a temporary tax status given until HMRC works out which tax code applies. This can happen for a number of different reasons (Again, helpful for trying to understand…)
- You’ve started a new job and haven’t got your P45 from your old employer.
- You’re starting your very first job.
- You’ve become an employee (and are now paid via PAYE) after being self-employed.
- You get company benefits (like a van or car).
- You receive the state pension.
If you have been placed on emergency tax, your code will probably look like this:
- 1257 W1
- 1257 M1
- 1257 X
And there you have it – Understanding UK Tax Codes 101.
We hope this blog has been helpful and if you have any questions about anything accountancy related, get in touch.
In the meantime…
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Take it easy.
Al and Led
