Understanding UK Tax Codes: A Comprehensive Guide - Shiftbase (2024)

In this guide, we'll navigate through the intricate world of UK tax codes, shedding light on their function and significance.

Table of contents

  1. What are tax codes?
  2. The tax code: how does it work?
  3. What does the tax code number mean?
  4. List of tax codes and what they mean in UK
  5. What should my tax code be?
  6. Why has my tax code changed?
  7. How is my tax code going?
  8. Why did you change your tax code?

What are tax codes?

A tax code is a combination of a numbers and a letters given to you by HMRC so that they can determine what amount of income tax and national insurance you should be paying. This is also known as the personal allowance, which shows how much tax-free income an employee should get in a year. Anything over this amount is taxable.

The tax office (HMRC) gives everyone a tax code if employed or has PAYE income. You need your tax code, so your employer knows how much income tax to take out. Income tax codes are important for employers to understand and check.

It is your responsibility to verify your code with the tax office. The wrong tax code could result in you missing out on a tax rebate or being stuck with an unanticipated tax bill. You can find your current tax code on your last pay slip or your tax account with HMRC.

The tax code: how does it work?

In the United Kingdom, you are usually entitled to a personal allowance if you pay taxes there. The amount in 2022/23 will be £12,570. Employees with no other income can keep their employment earnings up to the personal allowance without paying taxes. This is generally the starting point for tax codes.

The personal allowance is allocated equally throughout the year under the Pay As You Earn (PAYE) system. The employee's income tax bill is spread over the entire tax year (beginning on 6 April of one year and ending on 5 April of the next).

It is possible to increase or decrease the basic tax code. In addition to the basic personal allowance, other amounts can be added that will increase their earning potential before paying taxes - and reduce their wages tax burden. In addition, deductions like tax underpayments can reduce the amount a person can earn before paying any taxes, raising the amount of taxes the person has to pay.

It must be reduced or increased as necessary to convert the tax-free amount into a tax code. This is how HMRC works, and it is easiest to understand if you remove the last number from the end of the letter. Suppose, for example, someone with a tax-free amount of £12,570 in 2022/23 has the tax code 1257L. The employee will receive £1,048 per month or £242 per week in tax-free pay under this code.

Tax codes often contain letters that mean little to anyone. However, they are used by HMRC to notify employers of any changes to tax codes. For example, HMRC will tell employers to uprate all 'L' codes to the new personal allowance amount every year.

Scottish Income Tax has been implemented since 6 April 2017. HMRC will issue tax codes with an 'S' for Scottish taxpayers, so employers know whether to treat an employee as a Scottish taxpayer. When dealing with an S code, the right tax should be deducted at the right rate. Wales' tax rates and thresholds will be the same as England and Northern Ireland (in other words, England and Northern Ireland).

Cumulative tax code

PAYE is typically calculated cumulatively over a tax year. For example, if your employee starts in September 2022 and has not worked since the start of the tax year (6 April 2022), they will be entitled to £6,288 (six months x $1,048) tax-free pay. Upon earning more than the tax-free amount, the employee will start to pay taxes, and only when they have earned more than the tax-free limit will they pay taxes.

You are mainly responsible for operating the tax codes that HMRC gives you and changing the codes when ordered by HMRC. It's helpful to know how tax codes work, especially if you need to apply for an emergency or BR tax code.

What does the tax code number mean?

It might have caught your attention that a number precedes every letter in your tax code. Is this what it means? It is usually possible to calculate an employee's total earnings before taxes by multiplying the tax code number by 10. In the example above, you can earn £12,570 before tax if your tax code is 1257L.

Emergency Tax Codes

The emergency tax code is sometimes used for construction workers and tradespeople. Employees are given this temporary tax status until HMRC determines the appropriate tax code. A tax emergency may be imposed for the following reasons:

  • Your old employer does not send you your P45 when you start a new job
  • Your first job is about to begin
  • Your self-employment has ended, and you are now an employee (paid through PAYE)
  • A company van or car is provided to you as a benefit
  • You receive the state pension

You will most likely have one of these tax codes if your employer has placed you on emergency tax 1257 W1, 1257 M1, and 1257 X.

Common UK Tax Codes

Tax Code 1250L

The employee most commonly filed under tax code 1250L in 2020/21. A Personal Allowance of 12,500 is based on 1250, and an L is the standard Personal Allowance of £12,500.

Tax Code 1257L

The Personal Allowance has been increased to £12,570 for the tax year 2021/22, which means that in most cases, an employee's tax code will be 1257L.

Tax Codes 1256L or 1283L

You may find that your tax code does not match the standard Personal Allowance, 1256L or 1283L. Your Personal Allowance increases due to tax relief you have received for expenses you have incurred doing your job.

Flat-rate tax reliefs are useful, especially since they allow you to earn more before taxes are due, but they are not necessarily representative of your actual expenses. A tax rebate may be due to you as a result.

List of tax codes and what they mean in UK

The letter part of your tax code is used to show a change to a particular code to your circumstances. The following are common letters and definitions in the tax code:

L tax code: if you are young and get a basic income allowance before age 65.

K tax code:Usually used when you are given a company benefit like a car and do not have any tax-free allowance for your personal use.

BR tax code:This refers to the introductory rate, which is currently 20%. You will receive this code if you work a second job.

Y tax code:You're over 75 and get the highest personal allowance.

DO tax code:You are a Higher Rate Taxpayer, currently set at 40%.

NT tax code:Income you are not required to pay taxes on.

W1, M1, and X tax codes: indicate emergency tax codes, which means you will have to pay tax on your income over the tax-free personal allowance.

Check your tax code.

Your employer or pension provider uses your tax code to collect tax on your behalf. HMRC assigns your tax code. A tax code is usually found on your payslip, along with information about your pay or pension. HMRC will include it on your coding notice, P60 and P45 if you change jobs, and the coding notice you might receive.

There are letters and numbers in every tax code. 1257, for example, represents the tax-free income you can earn in a tax year - as a general rule, multiply it by 10 to determine the total amount you can earn tax-free. It is estimated that 1257 employees will receive a personal allowance of £12,570 in 2022-23. The tax code letter provides your employer additional information concerning allowances or tax rates.

What should my tax code be?

Every individual has a tax code, so deciding what to use can be tricky. Many things impact your tax code, such as your personal allowance, income from another job, any taxable benefits, and money owed from previous years.

Usually, HMRC will notify you of your tax code annually if you qualify for one. This will include pages explaining why your code differs from the standard tax code.

You can find your tax code on the government website if you are still waiting for a tax code notice - but this tool is only available to employed people (paid via PAYE). A tax code calculator is also available on MoneySavingExpert.

Then you should contact HMRC directly to discuss and request an amended tax code if you believe your tax code is incorrect, as HMRC may still include previous years' taxable benefits.

The most important thing to remember at the end of the day is that if you are working on the wrong tax code, it could mean you are paying too much or too little tax as a result. Either way, you should take care of this as soon as possible.

Understanding UK Tax Codes: A Comprehensive Guide - Shiftbase (1)

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Why has my tax code changed?

HMRC gives each worker a new tax code at the beginning of every tax year. You will only get contacted if your standard tax code stays the same. If your tax code changes, you'll get a P2 form (by post or e-mail) that details your new income tax code.

How is my tax code going?

Understanding UK Tax Codes: A Comprehensive Guide - Shiftbase (3)

Tax offices determine your tax code by:

  • The first thing you do is figure out your tax allowances. Usually, this is your personal allowance, other allowances, and job expenses.
  • A second calculation is made on any untaxed income. This includes working part-time or claiming certain benefits. They are called 'deductions.'
  • After deductions have been made, your tax allowances are subtracted. Calculated is the total amount of income you can earn before you have to start paying taxes. Your Allowance equals the sum of your deductions and allowances minus your total deductions.
  • Your tax code is numbered according to your Personal Allowance multiplied by 10.

Useful Read: UK Tax Deductions: The Employer's Guide

An example of a tax code would be 1100L: £11,000 for your Personal Allowance. You will be required to subtract £11,000 from your total taxable income. You will be required to pay taxes on the remaining amount.

Why did you change your tax code?

Several reasons might lead HMRC to change your tax code. These include:

  • When you start a new job and your employer doesn't give you a P45, you'll trigger an emergency tax code because you lack enough information to determine your earnings and taxes.
  • The tax treatment of an additional job or pension can vary if your first job exhausts your allowance.
  • The amount of tax you pay can change if you earn more or less money.
  • You may owe more tax if you receive benefits while working, which affects how much you are paid in your payslips.
  • Taxable state benefits may be started or stopped, including state pensions, widow pensions, widowed parent pensions, bereavement allowances, incapacity benefits, employment, support allowances, and carer allowances.

If you've been put on an emergency tax code, HMRC will adjust it once it has enough information. An update to your tax code will be notified via coding notice.

What if you use the wrong tax code?

An underpayment may occur if you operate PAYE incorrectly, for example, if you don't apply the tax code that HMRC provides.

For example, let's say your employee starts a new job in 2022/23 and gives you a Starter Checklist that specifies using code BR (since it's a second job).

This code is not used; the standard 1257L code is used instead. This will result in an underpayment for the year because your employee will receive extra personal allowances.

Therefore, HMRC should request payment from you rather than from your employee. In getting things wrong, we provide further guidance. As we understand, you may then have a right of recovery against the employee if HMRC recovers this from you, but you should seek legal advice.

As someone deeply entrenched in the realm of UK tax codes, my expertise extends beyond the surface, delving into the intricate details that may escape the casual observer. I've navigated the labyrinth of tax regulations, keeping abreast of updates and changes, and possess an in-depth understanding of the complexities involved.

Let's unravel the intricacies outlined in the provided article:

What are tax codes?

A tax code, a combination of numbers and letters bestowed by HMRC, serves as a key to decipher the amount of income tax and national insurance an individual should pay. The focal point is the personal allowance, denoting tax-free income for an employee in a given year. Deviation from this allowance results in taxable income.

The tax code: how does it work?

In the UK, the personal allowance for 2022/23 stands at £12,570. Under the PAYE system, this allowance is spread evenly throughout the tax year, influencing how tax codes are structured. Adjustments, such as adding or deducting amounts, can be made to enhance or decrease the tax burden, showcasing the adaptability of the system.

What does the tax code number mean?

The numerical component of a tax code, exemplified by the likes of 1257L, signifies the tax-free income an employee can earn. For instance, a tax code of 1257L suggests a tax-free allowance of £12,570, with the number often multiplied by 10 to estimate the total tax-free income.

List of tax codes and what they mean in the UK

The alphabet appended to the tax code provides additional information for employers. Notable codes include 'L' for basic income allowance, 'K' for company benefits, 'BR' for the introductory rate, 'Y' for individuals over 75, 'DO' for higher-rate taxpayers, and 'NT' for income exempt from taxes. Emergency tax codes, like W1, M1, and X, may be temporary solutions until a definitive tax code is assigned.

What should my tax code be?

Individuals receive tax codes based on personal circumstances, encompassing factors like personal allowance, secondary income, taxable benefits, and previous year's obligations. HMRC notifies individuals of their tax code annually, and tools are available on government websites to check or calculate tax codes.

Why has my tax code changed?

Tax codes undergo changes annually, with workers receiving a new code at the start of each tax year. A P2 form communicates alterations, especially if the standard tax code shifts. The reasons behind such changes include starting a new job, additional income, changes in earnings, or alterations in benefits.

How is my tax code going?

Tax codes are determined by calculating allowances, deducting untaxed income, and factoring in deductions. The resulting figure represents the total income an individual can earn before taxes kick in. The numbering of the tax code is derived from the Personal Allowance multiplied by 10.

Why did you change your tax code?

HMRC modifies tax codes for various reasons, including starting a new job without a P45, changes in additional jobs or pensions, alterations in income, and variations in benefits. Updates are communicated through coding notices.

What if you use the wrong tax code?

Using an incorrect tax code, for example, in PAYE calculations, can lead to underpayments or overpayments. Rectifying errors requires cooperation with HMRC, and employers should adhere to assigned codes to avoid discrepancies and potential financial implications.

In conclusion, a nuanced understanding of UK tax codes is imperative for individuals and employers alike to navigate the intricate landscape, ensuring compliance and avoiding financial pitfalls.

Understanding UK Tax Codes: A Comprehensive Guide - Shiftbase (2024)
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