What do tax codes mean and what should I be on?

Your tax code is used to work out how much income tax you must pay. The code is used by your employer or pension provider.

HM Revenue and Customs (HMRC) will tell your employer which code to use. Having the correct tax code is important; otherwise, you could pay too little or too much tax. 

If there is a change to your tax code, HMRC should contact you to explain how your new code has been worked out. You also need to inform the HMRC of any changes to your income.

What is a tax code?

A tax code combines numbers and letters to show HMRC how much tax you should pay.

Ensuring you have the correct tax code means you’ll have a set amount of income you don’t pay tax for – called your Personal Allowance. 

Anything you’ve earned above this amount is taxed.

Who receives an Income Tax code?

Your employer will give you a tax code via HMRC. This will be shown on your payslip.

If you’re self-employed, you won’t have a tax code as you’re not paid through PAYE. Instead, you pay tax when you complete a self-assessment form each year.

UK tax codes explained

Your tax code is made up of numbers and letters. 

The numbers relate to your Personal Allowance.

The letters are more descriptive and give more guidance on what level of tax you pay.

There are a fair few different letters that you may see in your tax code:

L – You’re entitled to the standard tax-free Allowance

M – Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal Allowance

N – Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner

T – Your tax code letter includes other calculations to work out your Personal Allowance

OT – Your Personal Allowance has been used up, or you’ve started a new job, and your employer doesn’t have the details they need to give you a tax code

BR – All your income from the job or pension is taxed at the basic rate

DO – All your income from the job or pension is taxed at the higher rate (this code is used if you have more than one job or pension)

DI – All your income from this job or pension is taxed at the additional rate (this code is used if you have more than one job or pension)

NT – You’re not paying any tax on the income

“K” at the beginning of your tax code

Tax codes with a K at the beginning are issued by HMRC in very particular circumstances and result in more tax being collected through your PAYE income. 

The code means you have income that is not being taxed another way.

The K code will be calculated because the tax office believes you should have your tax-free Personal Allowance reduced to allow for more tax to be taken from your salary. 

For most people, this can happen in a few circumstances, including when you: 

• pay taxes you owe from a previous year through your wages or pension 
• receive benefits you need to pay tax on – such as state benefits or company benefits

Your employer (or pension provider) will take the tax due on the income that hasn’t been taxed. However, employers and pension providers are prohibited from taking more than half of your pre-tax wages or pension when using the K tax code.

Understanding an emergency tax code

Several codes can be used to show if you are paying “emergency tax”.

You are looking to see if the tax code on your pay slip has “W1”, “M1”, or “X” at the end.

This might show like:

• 1257 W1
• 1257 M1
• 1257 X

These tax codes mean tax is paid on all income above your basic Personal Allowance. 

If HMRC doesn’t have your most current income details after a change in your job, income or benefits, you may find you are on an emergency tax code.

Emergency tax codes are temporary

When your employer gives HMRC the correct details about your employment, they will update your tax code.

Where there is an overpayment of tax, you will get a refund or deduction against your current tax code.

What the numbers mean

HMRC works out your tax code by looking at your tax-free Personal Allowance and the income you have not paid tax on. 

Any company benefits (such as a car) are also looked at.

Letters in your tax code tell authorities about your personal situation. These letters impact what Personal Allowance you have.

Tax codes in Scotland

In Scotland, the tax code letters mean:

S – Your income or pension is taxed using the rates in Scotland

SOT – Your Personal Allowance has been used up, or you’ve started a new job, and your employer does not have the details they need

SBR – All your income from the job or pension is taxed at the basic rate (this code is used if you have more than one job or pension)

SDO – All your income from the job or pension is taxed at the intermediate rate (this code is used if you have more than one job or pension)

SD1 – All your income from the job or pension is taxed at the higher rate (this code is used if you have more than one job or pension)

SD2 – All your income from the job or pension is taxed at the top rate (this code is used if you have more than one job or pension)

If you’re working in Wales

If you are living/working in Wales, the letters in your tax code mean:

C – Your income or pension is taxed using the rates 

COT – Your Personal Allowance has been used up, or you’ve started a new job, and your employer does not have the details for a new tax code

CBR – All your income from the job or pension is taxed at the basic rate (this code is used if you have more than one job or pension) 

CDO – All your income from the job or pension is taxed at the higher rate (this code is used if you have more than one job or pension) 

CD1 – All your income from the job or pension is taxed at the additional rate (this code is used if you have more than one job or pension)

How to check your tax code

There are a few different ways you can check your tax code:

• on a “Tax Code Notice” letter from HMRC
• on your payslip
• displayed on any letters relating to your state pension
• online via the Government Gateway

Updating your tax code

HMRC will usually automatically update your tax code when your income changes. 

This information normally comes from your employer.

If you think you’re on the wrong tax code, contact the HMRC and give them up-to-date details about your income, job or pension.