Tax Codes Explained - what your tax code means Article Image

Tax Codes Explained - what your tax code means

A tax code is a string of letters and numbers that tells HMRC how much tax you should be paying - but what do they mean and why is it important?

Sometimes we open our payslips and only focus on the figure that goes into the bank, with little focus on any deductions such as tax being taken out. If you inspect the piece of paper you receive regularly, there is an important combination of numbers and letters which you shouldn’t ignore - the all-important tax code!

The code, which your employer receives from HM Revenue and Customs, explains what tax you will pay.

The amount of tax you pay all depends on your income - and how much tax you have already paid during the year, which also includes your personal allowance. To work out what tax you pay, HMRC gives you a code. Different people have different codes.

What does your tax code mean?

L You’re entitled to the standard tax-free personal allowance – you can earn £11,850 before any tax due to be deducted.
M Marriage Allowance - You have received a 10% transfer of your partners' personal allowance.
N Marriage AllowanceYou have transferred 10% of your personal allowance entitlement to your partner.
OT Your personal allowance has already been used, or you have started a new job and don’t have a P45, or you didn’t give your new employer the details they need to give you a tax code.
T If there are items HMRC need to review in your tax code
K Total allowances are less than total "deductions".
BR All income is taxed at the basic rate – Currently 20% 
D0 All income is taxed at the higher rate – Currently 40% 
D1 All income is taxed at the highest rate – Currently 45% 
NT No tax is taken from income or pensions.

The following codes relate to those with their main home in Scotland. It is the employee's responsibility to tell HMRC if their address changes.

S At the Scottish rates for an employee whose main home is in Scotland.
S0T When no P45 has been provided, or when the Personal Allowance is used up.
SBR For a second job or pension at the Scottish basic rate.
SD0 For a second job or pension at the Scottish intermediate rate.
SD1 For a second job or pension at the Scottish higher rate.
SD2 For a second job or pension at the Scottish top rate.
  

Other codes used

W1 (week 1) or M1 (month 1) at the end

This means the code has been up on an emergency status. For example, if you start a new job, the correct code may not be worked out before your first payday. This means you may be taxed the wrong amount at the start, but HMRC will correct this and automatically levelled out. Tax is calculated based on the current pay period, not the whole year.

The letter 'K'

The letter K is used when deductions are due for company benefits, state pension, or tax owed from previous years are greater than the personal allowance. The number is multiplied by 10.

For example, the code: K500 on a salary of £30,000 has taxable income of £35,000 (£30,000 plus £5000 (10x500)).

What if my tax code is wrong?

If your code is incorrect, you could end up owing the tax man money - even if it is not your fault. It’s important to be on the right tax code - if you are unsure you must speak to HMRC, it is not something your employer can sort out for you.

You can do this on the Income Tax Helpline 0300 200 3300 (or via the HMRC contact us page). 

How we can help

Aspen Waite has a dedicated payroll team who are committed to providing you with a professional and timely service. This can help ease the burden of time-consuming and complex legislation, allowing you to concentrate on running your business.

Contact our payroll team for more information about our range of payroll services.


Get in touch for expert advice and solutions for you or your business.

Call us on: 01278 445151