UK Tax Codes Explained: What are tax codes and what do they mean?

You may recently have received a tax coding notice, because it is around now that HMRC start issuing codes for the new tax year. These codes determine the amount of tax that will be deducted from your employment and pension income. Different codes are issued for different streams of income, meaning that different amounts of tax can be collected from the various sources. Only one code will be issued per source of income.

Note that tax codes are not issued for State Pension income. However, if you have another source of income, HMRC may add the state pension amount to this, to collect the tax via an adjusted code for that source of income.

Working out what a tax code means

A tax code is either a combination of numbers and letters, or just letters.

The numbers generally refer to the amount of tax-free income you can receive, but with the last digit removed, so you need to add ‘0’ to the number shown. If you are entitled to the standard personal allowance (currently £12,570), and no other adjustments, then the code will be 1257L.

The letter refers to your own situation. Such as if you have a second job (BR, DO or DI) or if you have claimed the marriage allowance (M, N). Letters can be added as either a prefix or a suffix.

The 3 common suffixes that follow a number

L – you are entitled to the standard personal allowance. This is shown as 1257L. This means you are entitled to tax free income of £1,048 pm or £242 pw.

M or N – you are claiming the marriage allowance where one partner utilises some of the others personal allowance

What does tax code K mean?

The K code means you have no tax-free income, and the number represents the additional amount you will be taxed on.

Tax code K is a prefix placed before a number. It is used when you have non-taxed income, such as a company car benefit, which is more than your personal allowance. It may also be used if you owe tax from a prior year or to collect tax from state pension income. The number shown x 10 will be added to the income stream that it relates to.

Codes that are just letters

BR – no personal allowance is received on this income. This is usually applied to a second stream of income such as a second job. The whole amount is taxed at 20%

DO – same as BR but in this case the whole amount is taxed at 40% because your other income (apart from the one that has the DO code) is expected to exceed £50,270.

DI – same as BR but in this case the whole amount is taxed at 45% because your other income is expected to exceed £125,140.

OT – no personal allowance is received on this income. The standard tax rates and bands are applied as normal. Usually issued when there is missing information such as a P45 from a previous employer.

NT – no tax is payable on this income. This is sometimes used for non-residents.

T – indicates HMRC needs to review some items, requires more information from you or there are more complex calculations that apply.

Prefix S or C – indicates you are taxed in Scotland or Wales

Codes that are added at the end (after another letter)

W1, M1, X – sometimes referred to as an emergency code. This is a temporary code issued when there is missing information, likely to be revised later. PAYE is operated on a non-cumulative basis meaning the tax paid to date is ignored and only 1 month or 1 weeks’ worth of personal allowance is given.

Adjustments for benefits and expenses

There may be adjustments to your code due to employment benefits such as medical insurance or a company car, that have not been included and taxed via your payslip. These will reduce the personal allowance available to you.

Conversely, you may be entitled to claim certain expenses such as an approved professional subscription or use of home allowance, which will add to the standard coding of 1257.

When are revised coding notices issued?

When HMRC receive any new information, such as when you start a new job, or when your tax return or a P11D return is submitted, they are likely to issue you with a revised coding notice which will incorporate this information.

Reviewing the codes

If you are issued an incorrect tax code, you will either be paying too much tax or too little. Therefore, it is important to check the tax codes, particularly if you do not submit tax returns each year, otherwise you could end up with a large tax bill or an adjustment to codes for the following tax year.

If you complete tax returns each year any under or over payment will become apparent once the tax return has been drafted and submitted. On the tax return, you also have the choice to opt out of having the balance owed at the end of the year being adjusted via a tax code for a future year, and this is always our preferred option as it is then much easier to understand and track future liabilities.

If you think any of the income details listed on the tax coding notice are materially incorrect you can notify HMRC online using this tool.  Check your income tax

Alternatively, speak to them on the phone on 0300 200 3300.

If you have engaged Competex to handle your personal tax returns, we would be happy to check your coding notice if you think something doesn’t look quite right. Just get in touch.