Making sense of your tax code can feel like an impossible task but it can help you understand how much of your wages are being deducted for tax purposes.
Whilst most people just assume their tax code has been calculated correctly, this is not always the case and you could be paying too little tax which will result in you owing HM Revenue & Customs (HMRC).
Already confused? Don’t worry, this guide will cover everything you need to know about your tax code from what a tax code is, who receives a tax code, how to know what your tax code should be, what to do if you have the wrong tax code, what each tax code means, what a K tax code is, and what an emergency tax code is.
What is a tax code?
Put simply, a tax code is a combination of number of letters that helps your employer determine how much tax should be taken from your salary every year and how much tax-free income you should be earning.
For example, is the most common tax code for the current tax year (2022/23) is 1257L because £12,570 is the current amount a UK taxpayer can earn without paying taxes.
HMRC will let your employer know which tax code you should be and, in most cases, should update your tax code in the event your income increases or decreases.
Does everyone have a tax code?
In the UK, you will have a tax code as assigned to you by HMRC if you receive a regular income through Pay As You Earn (PAYE). This is the system used by HMRC to collect tax from eligible employees’ income before they receive it.
There are different rules for employees that have more than one job. For example, your main job will usually have the tax code 1257L for the 2022/23 tax year (assuming you are paid more than £12,570) whilst your second job will have the tax code BR, D0, or D1 depending on whether it’s taxed at the basic, higher, or addition rate.
However, if you’re currently unemployed, in receipt of a state pension, or self-employed and tax your income through self-assesment, you won’t have a tax code.
How do I know what my tax code should be?
Checking your tax code is not common practice but it should be. Whilst it is up to your employer to deduct tax from your income, it is your responsibility to ensure your tax code is correct.
There are several places you can look to find out what your tax code is, including:
Payslip
Your weekly or monthly payslip should list your tax code
P60
Your P60 contains information on your tax records for the past tax year including your tax code
HMRC
Your tax code can be accessed on your personal tax account from HMRC (by calling directly or dowloading the app)
P45
Your most recent tax code will be noted on your P45 when you leave your most recent place of work
Notice of Coding (Form P2)
Your Notice of Coding or Form P2 outlines how much tax your employer will deduct from your wages in the upcoming year and usually arrives online or in the post at the start of every tax year
What do I do if I have the wrong tax code?
In most cases, HMRC will be informed by your employer that your income has changed and should automatically update your tax code to reflect these changes.
However, mistakes can still happen and if HMRC doesn’t receive information about your chance of circumstances in time, you will be assigned an incorrect tax code and may end up oweing HMRC income tax down the line.
If, for whatever reason, you believe your tax code is incorrect, you must check to ensure your employment details are listed correctly online.
If they are incorrect or haven’t been updated, you should contact HMRC as soon as possible to report a change in your income so they can assign you the correct tax code.
HMRC will then inform you and your employer of your new tax code which should take effect immediately and appear on your payslips going forward.
What does each tax code mean?
There are several tax codes in the UK, all of which mean something different.
Here is a rough guide to the most common tax codes and what they mean:
- L – you qualify for the standard tax-free Personal Allowance (£12,570 for the 2022/23 tax year)
- M – you have received 10% of your partner’s Personal Allowance
- N – you have transferred 10% of your Personal Allowance to your partner
- T – your tax code requires additional calculations to determine your Personal Allowance
- S – your tax code is based on current rates in Scotland
- C – your tax code is based on current rates in Wales
- Y – your Personal Allowance is higher because you were born before April 6, 1938
- NT – you don’t pay tax on this income
- 0T – your Personal Allowance has been used up, you don’t have a P45, or your new employer hasn’t been informed of your new tax code yet
- BR – this income is taxed at the basic rate (tax code BR is usually issued when you have a second job or pension)
- D0 – the income from this job is taxed at the higher rate
- D1 – this income is taxed at the additional rate
- M1 or W1 – your tax code refers to the amount earned during a particular week or month (non-cumulative)
What is K tax code?
The K tax code is only used in exceptional circumstances but it is important to know what it means in the event you come across it on your payslip.
It is sometimes referred to as being the opposite of the L code and essentially means your tax deductions owed to HMRC from previous years equal more than your Personal Allowance.
Because of this, more tax will be collected through your PAYE income.
The K tax code can be issued for a number of reasons but usually happens when you receive a large company benefit (such as a company car) from your employer, are in receipt of a state pension at the same time as another PAYE income that you need to pay tax on, or are paying tax owed from a previous year.
What is an emergency tax code?
An emergency tax code may be used by your employer if your correct tax code isn’t available yet.
This usually happens when you start a new job and have yet to receive a P45 from your previous employer.
If you’ve been issued with an emergency tax code, it means you’ll miss out on your tax-free allowance that you would otherwise be entitled to.
However, emergency tax codes are usually only issued as a temporary measure until the end of the yax year or when HMRC informs you and your employer of your new tax code.
