Tax Codes Explained - Check Your Tax Code

Understanding UK tax codes explained in detail empowers you to take control of your finances. If you’re unsure about your tax code, always take the time to review it. From helping you check your tax code to liaising with HMRC, Blue Arrow is here to support you every step of the way.

What is a Tax Code?

A tax code is a crucial identifier issued by HM Revenue & Customs (HMRC) to determine how much income tax should be deducted from your salary or pension. Tax codes have been in use for decades to simplify payroll calculations for employers and ensure individuals pay the correct tax based on their personal circumstances. If you’re new to the topic and asking, “What is a tax code?”, it’s essentially the set of numbers and letters that dictates how much of your income is tax-free.

Every working individual in the UK is assigned a tax code, making it an integral part of the PAYE (Pay As You Earn) system. By understanding tax codes, you can ensure your employer deducts the right amount of tax, avoiding errors that lead to overpayment or underpayment. It’s important to check your tax code regularly to avoid any surprises in your pay.

How to Interpret Your Tax Code

If you're wondering how to interpret UK tax codes, they might initially seem confusing. However, by breaking them into numerical and alphabetical components, you can easily understand what they mean.

Here’s a breakdown:

Breaking Down the Numbers in Your Tax Code

The numbers in your tax code represent the amount of income you can earn tax-free in a financial year.

For example, if your tax code is 1257L, the number 1257 means you can earn £12,570 without paying income tax. This figure is derived from your personal allowance, which can change depending on your circumstances, such as income levels or additional benefits.

Regularly checking your tax code helps ensure these numbers align with your current personal situation. If you're overpaying tax, understanding your tax code is the first step toward fixing it.

What Do the Letters in Your Tax Code Mean?

The letters in UK tax codes reflect your specific tax situation and how it impacts your personal allowance. For example:

L: Standard personal allowance.
BR: Basic rate tax applied to all earnings, often used for second jobs.
K: Indicates that deductions (e.g., benefits) exceed your allowance.

The letters in a tax code provide vital context, and knowing what they signify helps when you check your tax code for accuracy.

List of Tax Codes and What They Mean

L: You are entitled to the standard tax-free personal allowance.
W1: Emergency tax code - This is a temporary code that will be used if you have not yet provided details of your previous employment such as a P45 to your employer. Until HMRC can work out what your tax code should be, an emergency code will be used.
M1: Emergency tax code - This is a temporary code that will be used if you have not yet provided details of your previous employment such as a P45 to your employer. Until HMRC can work out what your tax code should be, an emergency code will be used.
X: Emergency tax code - This is a temporary code that will be used if you have not yet provided details of your previous employment such as a P45 to your employer. Until HMRC can work out what your tax code should be, an emergency code will be used.
M: Marriage Allowance: 10% of your partner's personal allowance has been transferred to you.
N: Marriage Allowance: 10% of your personal allowance has been transferred to your partner.
T: Your tax code includes other calculations to work out your personal allowance. You can ask HMRC or your employer what these are.
OT: Your personal Allowance has been used up, or you have started a new job and your employer does not have the details they need to give you a tax code. You need to speak with your employer to resolve any issues.
BR: All of your income from this job or pension is taxed at the basic rate 20%. Usually used if you have more than one job or pension).
DO: All of your income from this job or pension is taxed at the higher rate 40%. (Usually used if you have more than one job and your earnings exceed £50,001.
D1: All of your income from this job or pension is taxed at the additional rate 45%. (Usually used if you have more than one job and your earnings exceed £150,000.
NT: You are not paying any tax on this income.
S: Your income or pension is taxed using the rates in Scotland.
SOT: Scotland - Your personal allowance has been used up, or you have started a new job and your employer does not have the details they need to give you a tax code.
SBR: Scotland - All of your income from this job or pension is taxed at the Scottish basic rate 20%. Usually used if you have more than one job or pension).
SDO: Scotland - All of your income from this job or pension is taxed at the Scottish intermediate rate 21%. (Usually used if you have more than one job and your earnings exceed £25,159.
SD1: Scotland - All of your income from this job or pension is taxed at the Scottish higher rate 41%. (Usually used if you have more than one job and your earnings exceed £43,431.
SD2: Scotland - All of your income from this job or pension is taxed at the Scottish top rate 46%. (Usually used if you have more than one job and your earnings exceed £150,000.
C: Your income or pension is taxed using the rates in Wales.
COT: Wales - Your personal allowance has been used up, or you have started a new job and your employer does not have the details they need to give you a tax code.
CBR: Wales- All of your income from this job or pension is taxed at the Welsh basic rate 20%. Usually used if you have more than one job or pension).
CDO: Wales - All of your income from this job or pension is taxed at the Welsh higher rate 40%. (Usually used if you have more than one job and your earnings exceed £50,001.
CD1: Wales - All of your income from this job or pension is taxed at the Welsh additional rate 45%. (Usually used if you have more than one job and your earnings exceed £150,000.

How to Check Your Tax Code

Knowing how to check your tax code is essential to ensure you are paying the correct amount of tax confidently. Here’s how to do it:

Using Your Payslip to Verify Your Tax Code

The easiest way to check your tax code is to look at your payslip. Your tax code is usually displayed near your name, National Insurance (NI) number, or salary details.

Find out more about how to understand your payslip to make sure your tax is accurately reflected.

Cross-Checking with HMRC Records

If you are unsure, cross-checking your tax code with HMRC is vital. Use the HMRC online tax checker to view your tax code and deductions. If anything seems off, contact HMRC directly to resolve the issue.

Understanding tax codes is key to identifying errors and avoiding overpayment.

Common Tax Code Issues

Even with a good grasp of UK tax codes, mistakes can happen. Here are some common issues to watch for so you can feed back concerns to your employer:

What is an Emergency Tax Code?

An emergency tax code is a temporary code used when HMRC doesn’t have enough information about your income. It typically results in higher deductions. Emergency tax codes often contain letters like W1, M1, or X. If you notice this on your payslip, check your tax code immediately and contact HMRC to resolve it.

What if My Tax Code is Incorrect?

If your tax code is wrong, your tax deductions will be too. Knowing how to fix a tax code is crucial in these cases. Contact HMRC with your NI number and details of your income or benefits. They’ll issue a corrected code to your employer.

You can find out more about this process and check tax codes at https://www.gov.uk/tax-codes/how-to-update-your-tax-code.

How to Update Your Tax Code

Updating your tax code is straightforward. Inform HMRC about changes in income, job status, or personal circumstances. You can do this online, via phone, or by mail. Keeping your tax code up to date prevents future errors so do ensure you notify HMRC, who will then change your tax code. The HMRC will also tell your employer or pension provider that your tax code has changed.

FAQs About Tax Codes

What Are PAYE Tax Codes?

The acronym PAYE, in PAYE tax codes, stands for Pay As You Earn. It is the system used by HM Revenue & Customs (HMRC) to collect income tax and National Insurance contributions from employees' wages or pensions. A PAYE tax code is a unique identifier used by HMRC to tell employers how much tax to deduct from an employee's earnings. Under PAYE tax codes, employers deduct tax and National Insurance contributions from employees’ earnings before paying them their salary. This system ensures that tax is collected regularly throughout the year rather than in a lump sum at the end of the tax year.

How Do I Find My Tax Code?

If you’re asking, “How do I find my tax code?”, you can locate it on your payslip, P60, or correspondence from HMRC. Alternatively, use the HMRC online checker to view your current tax code.

How Can I Change My Tax Code?

To change your tax code, contact HMRC directly. Provide them with information about your income, allowances, or any other changes. This ensures they can issue the correct code promptly.

What Happens if I Don’t Have a Tax Code?

Without a tax code, your employer may use an emergency tax code or deduct the wrong amount of tax. It’s essential to check your tax code and correct it with HMRC if necessary.

Does Blue Arrow Assist with Tax Issues?

Yes, Blue Arrow supports its employees and candidates by helping them navigate tax codes, including assisting with checking tax codes or contacting HMRC to resolve issues.