UK Tax Codes Explained

UK Tax Codes Explained

If you are employed and under 65 years of age, your employer will provide a tax code to work out how much income tax gets deducted from your salary. If you are a pensioner, your pension provider uses a tax code to determine your income tax deduction. But what does a tax code mean? And, why should you always check your tax code? In this article, we discuss the ins and outs of tax codes, tax code changes and what all this means to you. 

UK Tax codes – What is a tax code?

Your tax code determines and indicates how much tax gets deducted from your salary before you get paid. The tax code comprises a series of numbers and a letter. The numbers indicate your ‘personal allowance’, meaning how much you can earn per year without paying tax. You don’t start paying income tax until you earn an income above your personal allowance. The letter indicates your particular circumstance that determines the amount you can earn before paying tax. 

Tax codes – What does the letter in my tax code mean? 

The common letter in most tax codes is ‘L’, which means that you are under 65 years old, and eligible for the standard personal allowance free of tax. If your tax code says 1257L, you can earn £12,570 free of tax. You only start paying tax when your income exceeds that amount. 

Hence, tax code changes show a change in your circumstances and your taxable income. 

Here is a list of common tax code letters and what they indicate; 

K – K tax code is the opposite of the L tax code. This letter indicates that the tax you owe is greater than your ‘Personal Allowance’. This could happen when you have to pay tax on your wages from a previous year, company benefits or when you get a State Pension and need to pay tax for getting benefits from your work. 

BR – BR (Basic Rate) stands for the rate you pay for a second job or pension. This is currently set at 20%. 

NT – This means you have income that is not taxable.

T – If you earn over  £100,000, you lose £1 of your Personal Allowance. Your tax code gets a ‘T’ at this point, preceded by numbers indicating the level of Personal Allowance you have left. However, this may change depending on whether company benefits are forcing the K code on your tax code. 

OT – Once your income reaches £125,140, you are going to lose the allowance, and your entire earnings will be subject to the appropriate rates of Income Tax. At this point, your tax code will involve the letters OT.

S – S tax code shows that you are taxed based on the rates in Scotland

Tax codes and earning brackets

Taxable income  Tax rate 
Up to £12,570 0%
£12,571 to £50,270 20%
£50,271 to £150,000 40% 
over £150,000 45%

Correct tax code – How do I find my tax code? 

Where is my tax code? This is a valid question, and the answer is that there are several places you can check. 

Your tax code should be included in your pay slip. Or you could check the annual tax summary you get from your employer (P60). You could also get your tax code from your ‘P45’, the document you receive when you stop working for a certain employer.

If you have signed up to receive paper communication, you might get a PAYE coding notice (P2) informing how your tax code has been calculated. If not, they might send you an email informing you to check your Personal Tax Account for details. In fact, you can see your tax code if you fill in a tax return annually and have registered for online Self Assessment.  

If none of these work for you, call HMRC. You would need to produce your National Insurance Number, and they will ask a few security questions before revealing your tax code. 

Coding Notice – Does HMRC send coding notices? 

If your circumstances change during any point of the tax year, HMRC may send you a PAYE coding notice detailing amendments. You should always keep your coding notices to calculate if HMRC have calculated the tax code correctly, and make sure that your employer is using the correct tax code. 

Why should I check my tax code? – Checking if you’re on the correct tax code 

Is my tax code correct? Is my tax code wrong? These are legitimate questions you can ask yourself. 

Since your tax code indicates how much tax your employee deducts from your salary, the wrong tax code could mean either you are paying too much or too little tax. Hence, checking whether you’re on the correct tax code is important. If you are paying too much, you can get a tax refund (tax rebate). If you are paying too little, you need to sort the matter out soon, before you end up with massive overpayment. 

Tax code changes – What happens when my tax code changes? 

As we explained earlier, your payslip should have your tax code on it. If they believe that your circumstances change, HMRC will send a letter to your employer letting them know the code they should use. Consequently, your employer should change the tax code on your payslip. HMRC may change your tax code based on their calculations and information available. However, the actual circumstances may be different. Therefore, it is important to check whether your employer is using the correct code. 

Self-assessment tax returns – What should I do if my tax code changes?

Checking your tax code is imperative to avoiding complications and putting your finances in order for prosterity. 

For example, HMRC may send a higher tax code after you’ve claimed a tax refund as they assume you’ll be eligible for the tax relief next year. But, this may not be the case. You could use a tax refund calculator to check the correct tax code. However, this could be a little complicated, and we are here to help if you need to unravel the complexities. 

Tax rebate – Am I owed a tax refund?

Most people are not aware of the fact that they can use the daily costs of work to bring down the amount of tax owed. You might be eligible for a yearly tax refund from HMRC for a number of reasons. Here are some examples. 

  • You drive your own vehicle to work – Your employer does not refund you the 45p per mile allowance.
  • You take public transport to work, and your employer does not refund your cost 
  • You spend money on food while travelling for work – Your employer does not grant a meal allowance 
  • You spend your own money on accommodation when you travel for work 
  • You spend your own money on fixing and repairing work tools and equipment
  • You spend money out of pocket on essential training, professional subscriptions and necessary licences  

If you qualify for any of the above, you can use a tax refund calculator to see if you can get a tax rebate. 

If you are interested in getting help with your tax credit and financing, you can reach out to us. 

Translate »