Tax Codes Explained
Tax codes might seem like a completely different language and it can be hard trying to figure out what they mean. Thankfully, we’ve compiled a list of tax codes and what they mean to make life easier for you! We also explain how to check that you’re on the right tax code and what to do if your tax code is wrong. For everything tax codes, this guide is for you!
What is a tax code?
Your tax code is decided by HM Revenue & Customs (HMRC) and is used by your employer to work out how much tax to deduct from your salary. You’ll be able to find your tax code on your payslip. It’s a combination of letters and numbers, such as these - 1257L, S1257L, C1257L.
If you’re on a payroll, you’ll pay tax through the pay-as-you-earn (PAYE) system, which means tax is deducted before you receive your salary in your bank account.
Your tax code is important because it determines how much tax you should pay. If it’s incorrect, then you could end up overpaying hundreds of pounds. This is why we’ve put together this guide to help you understand your tax code and how to find out whether it’s correct.
What the numbers mean
The numbers in your tax code tell your employer how much tax-free income you get each tax year. The most common tax code for the current tax year is 1257L. This tax code is for the majority of people with one job and no untaxed income, unpaid tax or taxable benefits.
What the letters mean
The letters in your tax code represent your employment and how much tax you should pay. It gives your employers the information they need to tax you the right amount each month.
For example, L means you are getting the standard personal allowance of £12,570. While NT means that your income is not taxed at all.
List of tax codes and what they mean
Figure out what your tax code means by looking at the table below:
|Tax Code Letter||What it Means|
|L||Most common tax code letter. It means that you’re under 65 and eligible for the standard tax-free Personal Allowance. The basic Personal Allowance for 2021-22 is £12,570.|
|0T||This means you have no personal allowance and so your whole income will be taxed. This can happen when you don’t provide a P45 or if your personal allowance has been used up by previous income.|
|BR||All income is taxed at the basic rate. This usually applies to second jobs or pensions.|
|D0||All income is taxed at a higher rate due to personal allowances being used up.|
|D1||All income is being taxed at an additional rate because allowances have already been used up.|
|K||Total tax deductions exceed your allowances. If untaxed income on which tax is due exceeds annual allowances then the K code ensures that you pay tax on the excess.|
|M||This stands for Marriage Allowance which means that you’ll receive 10% of your partner’s personal allowance. This is an extra £1,260 of tax-free income.|
|N||This means you’ve used your Marriage Allowance and transferred 10% of your personal allowance to your partner.|
|NT||Your income isn’t taxed. This is in very unique cases such as musicians who are classed as self-employed.|
|C||This means you pay income tax in Wales.|
|S||This means you pay income tax in Scotland.|
|T||This means that HMRC needs to review your tax code. For example, your tax affairs might be complex.|
What about emergency tax codes?
You might be put on an emergency tax code after starting a new job or working for an employer after being self-employed. You’re put on an emergency tax code when your employer doesn’t have enough information to determine your tax.
Emergency tax codes are W1 or M1. These mean that you’re being taxed based on your monthly pay, not on your overall income. This usually means that you’re paying too much tax.
How do I get a refund if I have been given an emergency tax code?
If you find that you’re on an emergency tax code, you’ll want to get this changed to avoid overpaying tax on your income. If you have a P45, give this to your employer so that your tax code can be rectified.
Once your tax code is updated, HMRC will automatically send you a refund if you’ve paid too much tax.
Does everyone have a tax code?
Not everyone will receive a tax code. Here’s who does have a tax code:
- Full or part-time employees.
- People receiving a private pension.
- People with multiple jobs will have a tax code for each job.
Here’s who doesn’t have a tax code:
- Self-employed people who do a self-assessment tax return.
- Unemployed people.
- People only receiving state pension.
How does HMRC decide on my tax code?
Your tax code is worked out based on the following information:
- The personal allowance you’re entitled to.
- Income from other jobs.
- An estimate of other income HMRC expects you to have that isn't taxed (for example, savings interest.)
- Taxable benefits you receive (for example, a company car.)
- Whether you are due a tax refund or owe HMRC tax.
If any of this information is incorrect, you might be on the wrong tax code. We will explain this in more detail later on.
How to find out my tax code?
It’s important to remember that each type of income you earn (employment, pension, self-employed work) will have a different tax code, so remember to check them all!
Here are some places where you can look for your tax code:
- Payslip - your tax code is usually by your National Insurance number on your payslip, which you should receive from your employer every time you get paid.
- PAYE coding notice (P2) - you’ll receive this around March before the tax year starts. Your P2 explains what your tax code is and how it was created.
- P45 - the form you receive from your employer once you stop working for them. You’ll give this to your new employer when you start a new job.
- P60 - annual summary of your salary and the tax that was deducted. Employers need to give this to you at the end of each tax year.
- Pension advice slip - if you receive a private pension, it’ll be easy to find your tax code on this slip.
- HMRC - if you can’t get hold of any of the above, you can contact HM Revenue & Customs to find out your tax code. You’ll need to create a HMRC online account to do so.
Is my tax code correct?
If your tax code has changed, you should be sent something called a coding notice. This explains what your tax code is and how it’s been worked out.
You can also check your tax code online which also explains how your tax code was worked out.
You should check these things first before you question your tax code. If it makes sense to your situation, then you’re likely on the right tax code. If you’re still unsure, we explain how to figure out your tax code below:
How to find out what tax code you should be on
The first step is checking if your tax code number is correct. This is the formula HMRC use:
Your personal allowance - any deductions = the number in your tax code.
You might have deductions from benefits at work such as a company car, medical insurance, company credit cards etc.
These deductions are subtracted from your personal allowance which is probably the standard tax-free amount of £12,570. The final number you’re left with should match the one in your tax code (HMRC removes the last digit of this final number).
Most people’s tax codes are 1257L. If your tax code isn’t 1257L, check whether any of the following apply to you:
What to do if you’re on the wrong tax code
Now that we’ve explained the in’s and out’s of tax codes, you should be able to tell whether your tax code is right or wrong based on your earnings and employment situation.
It’s your responsibility to check whether you’re on the correct tax code. If it’s wrong there are two possible scenarios - you’ve overpaid or underpaid tax.
I’ve overpaid tax - will I get a refund?
If you think that your tax code is wrong you’ll have to tell HMRC and explain why.
There are two easy ways to do this:
- Call HMRC on 0300 200 3300 and discuss it with someone over the phone.
- Log into your personal tax account online and say your tax code is wrong.
If your tax code is wrong in the current tax year, then HMRC will tell your employer and your tax code will be amended. You’ll then be refunded any overpaid tax in your wages.
However, you can claim back up to four years of overpaid tax. So, if you’ve been on the wrong tax code for a while, make sure you claim back as far as you can!
I’ve underpaid tax - will I have to pay it back?
If your tax code is wrong and you’ve been underpaying tax then you will have to pay it back. HMRC can usually only go back four years unless in unique circumstances where you’ve purposely ignored the fact your code is incorrect.
Even if it isn’t your fault that your tax code is wrong, HMRC will argue that it's your responsibility to check.
However, if your tax code is wrong, there are some situations where you won’t have to pay the bill:
- Your employer put you on the wrong tax code despite being sent the correct tax code by HMRC.
- If the tax underpayment is £50 or less in the past year, it’ll be written off.
- If the underpayment was made in a tax year ending more than a year ago you might be able to challenge it.
Will I have to repay tax all in one go?
You won’t have to repay any underpaid tax all in one go. You can arrange a payment plan with HMRC which will likely involve taking the payments from your earnings.
How do I repay underpaid tax?
If you owe less than £3,000 then HMRC will adjust your tax code to account for repayments. Usually this means your personal allowance will decrease so a higher percentage of your income will be taxed.
If you owe more than £3,000 then HMRC will send you a bill that they’ll request to be paid in 30 days. Don’t let this scare you, simply call HMRC to arrange a reasonable repayment schedule.
What if I can't afford to repay the tax?
If you can’t afford to repay the tax you owe, contact HMRC and discuss your options. In some rare cases, the underpaid tax might be wiped. For example, if you’re retired on state pension and the underpaid tax is from a previous employment.
If your tax can’t be wiped, you might be able to arrange a repayment plan that suits your circumstances.