Understanding UK tax codes is crucial for both employees and employers. This post aims to demystify these codes by providing a detailed explanation and list of common UK tax codes.
What are Tax Codes?
Tax codes are crucial tools used by employers and pension providers in the UK to determine how much Income Tax should be deducted from an individual’s salary or pension. These codes are issued by HM Revenue and Customs (HMRC) and are based on the individual’s personal circumstances, including their entitlement to the standard Personal Allowance and any additional allowances or deductions they may have.
Each tax code typically comprises a combination of numbers and a letter. The numbers reflect the taxpayer’s tax-free Personal Allowance – the amount of income one can earn in a year before paying tax. This figure is divided by 10 and added to the letter, which indicates how the tax should be calculated on the remaining income.
For example, the tax code ‘1257L’ is common in the 2022/23 tax year. The ‘1257’ means that the individual has a tax-free Personal Allowance of £12,570, and the ‘L’ indicates that they are entitled to the standard tax-free Personal Allowance.
Understanding your tax code is essential as it directly affects the amount of tax you pay. If your tax code is not correct, it could lead to you paying too much or too little tax. It’s important to regularly check your tax code, especially if your income or personal circumstances change, to ensure that you’re paying the correct amount of tax.
Tax codes may change annually to reflect adjustments in the Personal Allowance as determined by the government in the Budget. They can also change during the tax year if your circumstances change, such as starting a new job, receiving a new benefit from your employer, or due to changes in your income.
How to Read a Tax Code
Interpreting a tax code correctly is vital for understanding how much tax you will pay. UK tax codes are usually made up of one or more letters followed by a series of numbers. Here’s how you can read and understand them:
- Numbers in the Tax Code: The numbers in a tax code tell you how much income you can earn in a year before paying tax. To find out your tax-free Personal Allowance, you can multiply the number in your tax code by 10. For example, if your tax code is 1257L, you can earn £12,570 in a year before paying tax.
- Letters in the Tax Code: The letter or letters in your tax code refer to your situation and how it affects your Personal Allowance.
Detailed List of Common UK Tax Codes and what they mean
- 1257L: The standard tax code for the 2022/23 tax year, indicating a tax-free personal allowance of £12,570.
- BR: All income from this job or pension is taxed at the basic rate, typically used if you have a second job or pension.
- 0T: The OT tax code is used when your personal allowance has been used up, and no further allowance is to be given. Often applied to new employees without a P45.
- D0: All income is taxed at the higher rate (usually used for a second job or pension).
- D1: All income is taxed at the additional rate, applicable in certain high-earning scenarios.
- NT: No tax is to be taken from your income or pension.
- C0 (or C1, C2): Used for company directors to spread their tax-free personal allowance evenly over the year.
- S0T, SD0, SD1, SD2: These codes are prefixed with ‘S’ for Scottish taxpayers. The numbers correspond to the same rules as 0T, D0, D1, and so on.
- C: Custom tax code used when your tax deduction is not standard, often resulting from specific circumstances communicated by HMRC.
- K: Indicates you have income that isn’t being taxed in another way and it’s worth more than your tax-free allowance.
- M: Indicates you’re receiving 10% of your partner’s personal allowance.
- N: Indicates you’ve transferred 10% of your personal allowance to your partner.
- T: Typically used if there are any other calculations needed to work out your Personal Allowance, often involving a review by HMRC.
- L: Signifies you’re entitled to the standard tax-free Personal Allowance.
- M1/W1 (Week 1/Month 1): Emergency tax codes, applied on a non-cumulative basis. Each week or month is treated separately, often used when HMRC doesn’t have enough information.
Scottish and Welsh Tax Codes
- C: This prefix indicates you’re taxed under the Cymru/Wales rate.
- S: This prefix indicates you’re taxed under the Scottish rate.
Specific Circumstances and Adjustments
- Tax codes ending in ‘X’: Indicates a week or month 1 adjustment, where your tax is calculated on what you’re paid in the current period, without considering previous earnings.
- Temporary tax codes, like 1257L W1/M1, are used until HMRC has the information they need to give you a correct tax code.
How Tax Codes are Assigned and Updated
The process of assigning and updating tax codes is both dynamic and tailored to individual circumstances. Here’s an overview of how this works:
- Initial Assignment of Tax Codes:
- When you start a new job, your employer will ask you to complete a ‘starter checklist’ (previously known as a P46) if you don’t have a P45 from your previous job.
- HMRC uses this information, along with their records, to determine your correct tax code. This includes your estimated annual income, any untaxed income, and tax reliefs you are entitled to.
- Factors Affecting Your Tax Code:
- Your tax code can change due to various factors such as a change in jobs, receiving state benefits, or adjustments in your taxable income or personal circumstances.
- Changes in your pension contributions, charitable donations made through Gift Aid, or receipt of benefits like company cars also influence your tax code.
- Annual Review and Adjustments:
- HMRC reviews tax codes annually to reflect changes in Personal Allowance and tax law.
- At the start of each tax year (6th April), HMRC updates tax codes to account for any changes. This might include adjustments for underpaid or overpaid tax from the previous year.
- Notifying HMRC of Changes:
- It’s important to inform HMRC of any changes in your income or personal situation that might affect your tax code. This includes changes such as marriage or divorce, a second job, or other sources of income.
- HMRC will then issue a new tax code, if necessary, and inform your employer or HR department.
- Understanding Notices of Coding:
- HMRC sends out a Notice of Coding to explain how they calculated your tax code. This notice breaks down your Personal Allowance and any additions or deductions.
- It’s important to review this notice for any inaccuracies and contact HMRC if you have concerns or if there are any discrepancies.
- Role of Employers and Pension Providers:
- Your employer or pension provider uses the tax code assigned by HMRC to calculate the amount of tax to deduct before paying your salary or pension.
- If you receive a new tax code during the tax year, HMRC will inform them directly.
- Temporary Tax Codes:
- Sometimes, HMRC might issue a temporary tax code (indicated by W1/M1 or X at the end) if they don’t have enough information to provide a final code. These are updated once more information is available.
By understanding how tax codes are assigned and updated, you can ensure that you’re paying the correct amount of tax. If your circumstances change or you notice an error in your tax code, it’s important to contact HMRC promptly to avoid overpaying or underpaying tax.
What to Do If Your Tax Code is Wrong
Discovering that your tax code is incorrect can be worrying, but it’s a situation that can be resolved with the right steps. Here’s what you should do:
- Understand Why It Might Be Wrong:
- Before contacting HMRC, review the reasons why your tax code might be incorrect. Common reasons include incorrect personal details, outdated employment information, or changes in your taxable income or benefits.
- Check Your Personal Information:
- Ensure that HMRC has up-to-date and accurate information about your income, employment, and personal situation. This includes checking that they have the correct details of your current and previous jobs, pension contributions, and any taxable benefits you receive.
- Contact HMRC:
- If you believe your tax code is wrong, the first step is to contact HMRC. You can do this via phone, post, or through your Personal Tax Account online. Be ready to provide your National Insurance number and details about your income and employment.
- Provide Necessary Documentation:
- HMRC may require specific documents or information to reassess your tax code. This could include P60s, P45s, details of taxable benefits, or information about other income sources.
- Follow HMRC Instructions:
- After reviewing your case, HMRC will instruct you on the next steps. If they agree that your tax code is wrong, they will issue a new one and inform your employer or pension provider.
- Inform Your Employer or Pension Provider:
- While HMRC will notify your employer or pension provider about the tax code change, it’s a good practice to inform them yourself as well. This ensures that they are aware of the change and can implement it in their payroll system promptly.
- Keep Records:
- Maintain records of all communications with HMRC and your employer regarding your tax code. This includes dates of conversations, copies of letters or emails, and details of the information provided.
- Monitor Your Payslips:
- After your tax code has been corrected, check your subsequent payslips to ensure that the new code is being applied and that the correct amount of tax is being deducted.
- Seek Professional Advice If Needed:
- If you’re uncertain about your tax situation or if the issue persists, consider seeking advice from a tax professional. They can offer guidance and assist in liaising with HMRC.
- Claiming a Refund:
- If the incorrect tax code resulted in overpayment of tax, HMRC should automatically process a refund. However, if you don’t receive it, contact HMRC to enquire about the refund status.
Resolving an incorrect tax code promptly is crucial to ensure that you’re paying the right amount of tax. Staying informed and proactive can help prevent and address any tax code discrepancies efficiently.
FAQs about Tax Codes
- What does a ‘K’ code signify?
A ‘K’ code means you have income that isn’t being taxed in another way and it’s worth more than your tax-free allowance. This often includes owing tax from a previous year, or receiving company benefits like a company car.
- Can my tax code change during the year?
Yes, it can change if your income or personal circumstances change. This could be due to a change in jobs, receiving a company benefit, or owing tax from a previous year.
- How do I know if my tax code is correct?
Your tax code is based on the information HMRC has about your income and entitlements. If you think it might be wrong, compare it against your Personal Tax Account on the HMRC website or consult a tax professional.
- What should I do if I’m on an emergency tax code?
If you’re on an emergency tax code, your employer is not accounting for your full personal allowance. This usually happens when you start a new job. Provide your employer with a P45 form from your previous job or complete a ‘starter checklist’ to update your code.
- What does the ‘BR’ code mean, and when is it used?
‘BR’ stands for Basic Rate, and it means all your income from this job or pension is taxed at the basic rate (20%). It’s commonly used for a second job or pension.
- Are tax codes different for Scotland and Wales?
Yes, Scottish taxpayers have tax codes starting with ‘S’, and Welsh taxpayers have codes starting with ‘C’. These reflect the different tax rates and bands in Scotland and Wales.
- What happens to my tax code when I have more than one job?
If you have more than one job, your personal allowance will usually be applied to the job paying you the most. Your other job(s) might have a BR, D0, or D1 tax code, taxing you at the basic, higher, or additional rate respectively.
- Why might I have a 0T tax code?
A 0T code can be used if your personal allowance has been used up, or if there is not enough information for HMRC to issue the correct tax code. It results in a temporary ‘non-cumulative’ tax basis.
- How are tax codes adjusted for company benefits?
If you receive benefits from your company, like a car or private medical insurance, the value of these benefits is deducted from your personal allowance, which might change your tax code.
- What is the process for resolving an incorrect tax code?
Contact HMRC directly if you think your tax code is wrong. Provide them with the necessary information about your income and any changes. They will assess and issue a new tax code if needed.
It’s important to regularly check your tax code for accuracy. Misunderstandings can lead to incorrect tax payments. For personalised advice, always consult a tax professional.