TAX BASICS

Tax codes HMRC : What are tax codes? Explained

What is a tax code?

Every person employed or receiving PAYE income has a tax code that is assigned by the government’s tax collection agency (HMRC). You should know your tax codes assigned by HMRC since it tells your employer how much income tax to deduct from your pay.

How can your tax codes be checked?

HMRC assigns your tax codes, and your employer or pension provider uses that code to collect the correct amount of tax. It is common for a tax code to be displayed together with other financial information on your payslip. In addition, it will appear on any HMRC coding notices you receive, any P60s you receive at the end of the tax year. You’ll also receive it on any P45s if you move jobs.

My tax code has a lot of letters. What do they all mean?

The letter in your tax code indicates a change in a code that is unique to your situation.

Common tax code letters and definitions:

K – Most commonly used if you have a company benefit such as a car and do not have any tax-free personal allowance.

L – You are eligible for the standard tax-free Personal Allowance.

M – Your partner has given you up to 10% of their Personal Allowance.

N – You’ve given up to 10% of your Allowance to your spouse.

R- From the first penny, your income from this job (or pension) is taxed at the basic rate. This can happen if you have another job and your allowance is linked to it, for example. 

S – You are eligible for the Scottish Income Tax rate.

T- Your Personal Allowance includes some additional calculations.

Y – You are over the age of 75 and receive the maximum Personal Allowance.

BR – Stands for the basic rate, which is currently set at 20%. This is the most likely code you will receive if you have a second job.

DO – You pay a higher tax rate, which is currently set at 40%.

D1- All income from this job or pension is taxed at a higher rate.

NT – You have a Non-Taxable income.

0T- This means you’ve exhausted your Personal Allowance, you don’t have a P45, or you’ve started a new job, and they don’t have the information they need to determine your correct tax code.

How are HMRC tax codes Calculated?

Each tax code is made up of letters and numbers. The number 1250, for example, should reflect how much tax-free pay you’re allowed to earn in each tax year – as a general rule, multiply the number by 10. This will give you the total amount of income you can earn before being taxed each year. The tax office determines your tax code by:

First, your tax allowances are calculated. This is typically your personal allowance plus any other allowances and job expenses if any.

Second, any income that has not yet been taxed is calculated, such as part-time work or specific state benefits. These are referred to as your’ deductions.’

After that, your deductions are subtracted from your total tax allowances. The figure calculated is the total income you are permitted to earn before you begin to pay taxes. The maximum amount you can earn tax-free is calculated as follows:

‘total deductions’ minus ‘total allowances’ equals Personal Allowance.

This Personal Allowance figure is multiplied by ten and becomes the section number in your tax code.

As an example, the tax codes 1250L denotes:

The amount of your Personal Allowance is £12,500.

Your total taxable income will be reduced by £12,500. You have to pay tax on the remaining amount.

What does it mean when your tax code has changed from 1250L to 1256L or 1282L?

Numbers like 1256L or 1282L show that HMRC has added a tax relief to the amount you can earn before paying tax. This could be a reimbursement for expenses such as washing your work uniform or working from home.

Most people’s basic tax code for the 2020/21 tax year was 1250L. This means that up to £12,500 is tax-exempt. 

After you’ve claimed a tax refund, HMRC may change your tax codes to account for the work expenses you claimed that year.

It’s fine if your expenses don’t change from year to year. It simply means you won’t have to claim any tax refunds in the future. The problem is that most people’s expenses do not remain constant. So they must file a new tax refund claim each year to receive the money they are owed. If that describes you, you probably don’t want HMRC to change your tax code in this manner permanently.

Tax Codes for Emergencies

Because your correct tax code is unavailable, your employer will use an emergency tax code.

It’s just a temporary solution until the HMRC delivers you and your employer the proper tax code. You can find your tax code in your payslip or call HMRC to change or verify your emergency tax code.

What to do if my tax code is incorrect?

An incorrect tax code can result in one of two outcomes: you owe HMRC money because you paid too much tax, or you owe HMRC money because you didn’t pay enough tax.

Contact HMRC at 0300 200 3310.

What exactly is a PAYE coding notice?

A PAYE Notice of Coding, also known as a form P2, is a letter from HMRC that provides you with your tax code. It also explains why HMRC assigned you that tax code.

What will happen if I start a new job?

When employees start a new job, there is a procedure in place that helps to ensure PAYE continues to work accurately. Your new employer must follow a new starter process, which typically entails them gathering information from you, such as from a form P45 provided by a previous employer or by asking you to complete a new starter checklist.

What if I have multiple tax codes?

You will have more than one tax code if you have more than one job or pension. Your personal allowance will be deducted from whatever income HMRC considers to be your primary source of income. However, if you wish to transfer your personal allowance to a different job or pension, you must make a request to HMRC. 

If your personal allowance was used on your first job, you might find that whoever pays your second income might be instructed to deduct tax at the basic rate (20%) or higher rate (40%) using the BR or DO codes. This means you’ll have to pay taxes on everything you earn.

Always double-check your P2 form.

It is critical to double-check that the tax code listed on your notice of coding is correct, as well as that all of the information listed on your notice of coding is correct. Ultimately, it is your duty and responsibility to ensure that your tax code is correct, and the HMRC expects you to notify them if it is incorrect.

Tax Codes for Self Employed

If you are self-employed, you pay tax on your self-employed income through Self Assessment rather than PAYE, so this income does not have a tax code.

However, if you receive money from sources other than self-employment, such as a job or a pension, you will have tax codes for these sources of income. Your tax codes can be found in your P45 or payslip, and you can challenge it if you believe it is incorrect.

Using your tax code to pay your Self Assessment tax bill

If you get income from both self-employment and employment, you may be able to use your tax code to pay your Self Assessment tax payment.

This means that HMRC will change your tax codes to reflect your self-employed earnings and deduct the tax you owe from your salary when your PAYE tax is deducted. 

This option is only available if your

  • self-assessment tax bill is less than £3,000, and you file your tax return by December 30
  • you are someone who already pays tax through PAYE. For example, if you are an employee or receive a company pension,
  • you submitted your paper tax return by October 31 or your online tax return by December 30.

Sidharth Bharthan Menon
CEO, taxtotal​