The tax office assigns a tax code to everybody working or receiving income through PAYE (HMRC). Your tax code is important because it tells your employer how much income tax should be deducted from your pay.
UK tax codes are made up of 3 or 4 numbers and one letter. For example, the tax code 1257L is used by most people who have one job or pension. It shows HMRC how much income tax and National Insurance you should be paying. The figures represent the Personal Allowance amount you are entitled to in that tax year. You do not have to pay income tax until you earn more than your Personal Allowance.
What does the letter in my tax code mean?
The letter portion of your tax code shows changes to a code specific to your circumstances.
Common tax code letters and definitions:
L – You are under 65 and receive the basic Personal Allowance
K — You have a business perk, such as a car, and it signifies you don’t have any tax-free personal allowance
BR — The basic rate, is currently set at 20%. This is the most common code you will get if you have a second job
Y – You are over the age of 75 and receive the maximum Personal Allowance
DO — You pay a higher tax rate, which is presently fixed at 40%
NT — You have a non-taxable income
Why might tax codes change?
Your tax code may change if you:
- Have been given an incorrect code
- Move jobs and your new employer hasn’t received your P45 form. You may be placed on an emergency tax code until HMRC receives additional information.
- Become an extra rate taxpayer. If you earn more than £100,000, your allowance is gradually lowered, and your tax code is changed to reflect this.
Emergency Tax Codes
HMRC may apply an emergency tax code to your salary if they do not know how much tax you must pay. As a result, you may miss out on tax-free benefits that might otherwise be available to you.
When you first start working for a new firm, you are most likely to be placed on an emergency tax code.
Other reasons you may be required to pay emergency tax include:
- Beginning a new job for an employer after being self-employed
- Starting or stopping receiving job benefits you get taxable state benefits
- Claiming a marriage allowance or costs for which you receive tax relief.
If you are on an emergency tax code your payslip will show:
- 1257 W1
- 1257 M1
- 1257 X
This means you’ll have to pay tax on all of your earnings above the basic Personal Allowance.