UK tax codes explained

Your tax code tells your employer how much tax to take from your wages. In this article, we explain how UK tax codes are calculated, what they mean and the reasons they can change. You’ll also learn how to check your tax code and what to do if you have the wrong tax code.

What is a tax code?

Your tax code might appear to be a harmless sequence of numbers and letters, but it’s very important. Just one wrong digit could have a significant impact on your take-home pay.

If you’re being paid through the PAYE system, your tax code will tell your employer how much income tax to deduct from your salary or pension. HMRC will let your employer or pension provider know which tax code to use, but the onus is on you to check it’s correct. Having the wrong tax code could mean that you pay too much or too little tax.

It’s worth noting that you will only have a tax code if you’re employed or in receipt of a private pension. You won’t have one if you’re self-employed (instead you’ll pay tax through the self-assessment system) or are only receiving the state pension.

How are tax codes worked out?

Your tax code consists of letters and numbers, for example, 1257L. The numbers part tells your employer or pension provider how much money you can earn without paying tax. HMRC calculates this number by looking at your personal allowance and any other untaxed income you receive. They also take into account the value of certain other benefits you might receive as part of your job, for example, a company car or health insurance. 

If you have one job, live in England and don’t receive any company benefits, your tax code number will probably be 1257 for the 2021/22 tax year. This means you can earn up to £12,570 (the current personal allowance) without paying tax. Income above this amount will be taxed, although the rate of tax depends on how much you’re earning and whether you’re a basic rate, higher rate or additional rate taxpayer.   

The letters in your tax code reveal how your specific circumstances affect your personal allowance. L is the most common letter and signifies that you’re entitled to the standard personal allowance. Other examples include N, which shows you’ve used the marriage allowance to transfer 10% of your personal allowance to your spouse or civil partner, and M, which signals you’ve received 10% of your partner’s personal allowance.

There are lots of potential number and letter combinations, all of which have a different meaning. It’s also possible to have more than one tax code. This might be the case if you have more than one job or receive a pension.

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What is an emergency tax code?

Emergency tax codes are temporary tax codes that HMRC uses when they don’t have the necessary information to calculate your correct tax code. This might be the case if you’ve recently changed jobs or have started working for an employer after being self-employed.

An emergency tax code usually ends with M1 if you’re paid monthly or W1 if you’re paid weekly. These codes indicate your tax is being worked out based on your pay for that particular week or month, rather than your overall earnings for the year so far. This could mean you pay more tax than you need to, so it’s worth making sure HMRC have the details they need as quickly as possible.

Emergency tax codes are a temporary measure and HMRC will update your tax code when they have more information about your income. 

Why do tax codes change?

There are a few reasons why your tax code might change or you end up being given the wrong one. Some of the most common scenarios are outlined below.

  • You change jobs and your new employer hasn’t received your P45 form – in this case, you may be put on an emergency tax code until HMRC has more details 
  • You have another source of income – for example, a second job or a private pension 
  • You become an additional rate taxpayer – if you earn more than £100,000, your personal allowance will be gradually reduced and your tax code will be adjusted to reflect this
  • There’s a change to your state benefits – starting or stopping claims for taxable state benefits, such as the state pension and bereavement allowance, may affect your tax code
  • Your company benefits change – your tax code may need to change if you start receiving taxable employee perks such as a company car, private healthcare or a mobile phone.

Check your tax code as soon as possible if any of the above situations apply to you.

How to check your tax code

The simplest way to find out your tax code is to check your current payslip, where it should be shown alongside your pay. Your tax code will also appear on your PAYE coding notice (P2), which is usually sent to you before the start of the tax year. It explains what your current tax code is and how it was calculated.

You should also be able to find your tax code on your P45, P60 or, if you’re receiving a private pension, on your pension advice slip. If you can’t locate your tax code via these methods, you can check it online. You’ll need to sign in to your Government Gateway account and follow the instructions to verify your ID and access your tax information.

What to do if you have the wrong tax code

If you think your tax code is wrong, you’ll need to contact HMRC as quickly as possible. You can either call them on 0300 200 3300 or you can log in to your personal tax account and notify them online

If you’ve overpaid tax in the current tax year, HMRC will tell your employer and your tax code will be adjusted. The overpaid tax will normally be refunded to you through the PAYE system so you’ll receive more money in your pay packet. If the overpaid tax relates to a previous tax year, HMRC will usually send you a cheque.

An incorrect tax code might also result in you underpaying tax. In this instance, HMRC will normally seek to recoup the money. How they recoup the unpaid tax will depend on the amount that’s outstanding. If you owe less than £3,000, HMRC may change your tax code so you pay more tax on your earnings. However, if you need to pay back more than £3,000, they’ll most likely send you a tax bill. 

Either way, if you need to repay tax it’s important to review your monthly budget as you’ll have less money at your disposal.

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