Understanding your tax code is one of the most important things for you to do when receiving your employee payslip. Most of us just assume that our tax code will be correct however sometimes this is not the case. It could mean the difference between paying too much or too little tax.
Understanding your tax code
PAYE tax codes are made up of numbers followed by a letter. You have a tax code as part of the pay as you earn (PAYE) system. Your tax code tells HM Revenue and Customs (HMRC) how much tax you should be paying. Your tax code can change at any time due to your circumstances. A tax code isn’t unique to each individual person; many people have the same tax code for example 1185L.
How to check your tax code
The easiest way for you to check your tax code is to have a look at your payslip. It will also be on the P60 you get after the end of the tax year and P45 if you change jobs.
Tax code 1185L: what does it mean?
For example, 1185L is currently the most common tax code for the 2020/2021 tax year. 1185 refers to their tax-free personal allowance of £11850 which is then divided by 10 to get 1185. The appending l signifies you are entitled to the standard tax-free allowance. However, this process is different if you have the letter K in your tax code (see below).
List of Tax Codes
Once you’ve identified your tax code on your payslip, it’s important to know what your tax code means for you. Each tax code letter has a specific meaning and not everyone will have 1185L, so here’s a list of UK tax codes with a short explanation:
BR tax code
BR stands for the basic rate tax code. All income for this job is taxed at 20%. This usually applies if you have more than one job or pension.
D0 tax code
All your income for this job or pension is taxed at the higher rate of 40%; this is usually due to having more than one job or pension.
D1 tax code
All income from this job is taxed at an additional rate of 45%. This is also usually due to having more than one job or pension.
K tax code
K in your tax code means deductions are usually due for company benefits, pension or tax from a previous year and this amounts to greater than your personal allowance
L tax code
You are entitled to the standard tax-free personal allowance (see below for more information).
M tax code
You have received a 10% Transfer of your partners Personal Allowance (Read how tax affects marriage allowance).
N tax code
You have transferred 10% of your personal allowance to your partner.
NT tax code
This means you are not paying tax on this income.
0T tax code
All your personal allowance has been used or you have started a new job and your employer doesn’t have the details they need to give you a new tax code.
S tax code
This means your income or pension is being taxed using Scottish rates.
T tax code
This is used when other calculations are being used to work out your personal allowance. An example for this may be if your annual income is more than £100,000 and your personal allowance has to be reduced.
Non Cumulative Tax Codes
There are two non cumulative tax codes – W1 and M1. These stand for week one and month one. These are placed alongside your tax code to signify the tax is calculated only on the current tax period (paid either weekly or monthly) rather than the entire year, making it non-cumulative.
How tax codes work
The numbers on your tax code are worked out by adding up any income that you haven’t paid tax on and the value of any benefits from your job (e.g. a company car). The income that you haven’t paid tax on is then taken away from your personal allowance. What’s left is the tax-free income you’re allowed in a tax year. This amount is divided by 10 and the relevant letters are added to inform employers, pension providers or any other financial services about how much tax-free income you are entitled to in that tax year.
Personal Allowances 2019/2020
| 2017/2018 | 2018/2019 | 2019/2020 |
|---|---|---|
| £11,500 | £11,850 | £12,500 |
Any earnings over and above your personal allowance are taxed as follows:
| Individuals – UK | Rate | 2017/2018 | 2018/2019 | 2019/2020 |
|---|---|---|---|---|
| 0% | Up to £11,500 | Up to £11,850 | Up to £12,500 | |
| Basic rate | 20% | £11,501 to £35,500 | £11,851 to £34,500 | £12,501 to £37,500 |
| Higher rate | 40% | £35,501 – £150,000 | £34,501-£150,000 | £37,501-£150,000 |
| Additional rate | 45% | Over £150,000 | Over £150,000 | Over £150,000 |
These rates are different if you live in Scotland
How to change tax code
If you think your tax code it wrong it is important to contact HMRC straight away to avoid paying too much tax. For more information on tax codes, you can visit the HMRC website here.
Further reading
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