In the UK, tax codes are essential for determining how much income tax is taken from your salary or pension. They’re issued to individuals by HMRC and can sometimes be a source of mass confusion. Understanding your tax code is crucial for ensuring that you pay the correct amount of tax and you are taking home the right amount each month.

Whilst a Tax Code may look like a random mixture of letters and numbers to some, it is actually used to calculate the amount of income tax you should pay. Once you understand your tax code they are all quite easily interpreted if you follow the basic pattern. The numbers in your tax code represent the personal allowance you are entitled to, which is the amount of money you can earn before taxation and the letters that follow usually indicate any adjustments that may apply to your tax situation.

An example of one of the most common tax codes seen for an individual is 1257L, this means you are entitled to a tax free allowance of £12,570 and the ‘L’ is a code that signifies you are eligible for the standard personal allowance.

Other common Tax Code examples may include;

M represents the Marriage Allowance meaning you’ve received a transfer of 10% of your partner’s personal allowance whilst the letter N also represents the marriage allowance means you have transferred 10% of your personal allowance to your partner.

BR which indicates all income is taxed at the basic rate of 20%.

0T is used when there is no personal allowance available and all income is therefore taxed at the applicable rates.

D0 which indicates that all income is taxed at the higher rate of 40%

NT is used where no Tax is deducted from income.

Should your Tax Code have W1, M1 OR X at the end of it, this indicates you have been emergency taxed due to HMRC not receiving your income details in time after a change in circumstances and can be rectified once your information has been updated.

Some other Tax Codes that may not be so commonly seen include;

K means you have income that is not being taxed another way and it is worth more than your tax-free allowance. For most people this may happen when you are paying tax owed from a previous Tax Year through your wages or pension or if you receive benefits you are required to pay tax on.

S means your pension and income are being taxed using the rates applicable in Scotland.

C means your pension and income is being taxed at the rates applicable in Wales. 

All Tax Codes listed above can be repeated with either a ‘S’ or an ‘C’ in front of them indicating that the meaning remains the same but the place of application has changed to either Wales or Scotland as stated above.

Tax codes are subject to the circumstances surrounding the individual and therefore can change. Whilst there are several reasons your tax code may change, the most common would be due to starting a new job, receiving additional benefits or adjustments to personal allowances. If you notice a change in your tax code and you don’t understand why, it’s important to check with HMRC.

An incorrect tax code can lead to either underpaying or overpaying tax and can result in a refund or an additional bill so it’s always better to confirm with HMRC. Whether you are unsure it is the correct tax code for your situation or simply if you don’t understand why you have a certain tax code, they are always happy to help. Otherwise, you can find help on the Government Website’s Overview on Tax Codes.

Should you have any queries regarding your Tax Code, pay or any Accountancy and Financial queries, please do not hesitate to reach out to us at Cheylesmore Accountants, where everyone is always happy to help. You can reach us at 024 7601 7778 or alternatively, send us an email at admin@cheylesmore.com.