How Do Tax Codes Work?
Understanding tax codes is essential for employees, employers, and self-employed individuals in the UK. Your tax code determines how much tax HMRC deducts from your salary or pension. If your tax code is incorrect, you could be paying too much or too little tax.
What Is a Tax Code?
A tax code is a series of numbers and letters assigned by HMRC to indicate how much Income Tax should be deducted from your salary, wages, or pension.
For example, a common UK tax code is 1257L.
Breaking Down a Tax Code (Example: 1257L)
- Numbers (1257) – This represents your tax-free Personal Allowance (£12,570 for 2024/25).
- Letter (L) – Indicates that you are entitled to the standard tax-free allowance.
How Tax Codes Work in Practice
If your tax code is 1257L, you can earn £12,570 tax-free in a year. After this amount, your income is taxed at:
20% (Basic Rate) on earnings between £12,571 and £50,270
40% (Higher Rate) on earnings between £50,271 and £125,140
45% (Additional Rate) on earnings over £125,140
Common Tax Code Letters and What They Mean
| Tax Code | Meaning | Who It Applies To? |
|---|---|---|
| L | Standard tax-free Personal Allowance | Most employees |
| BR | Basic Rate (20%) applied to all income | Second jobs or pensions |
| D0 | Higher Rate (40%) applied to all income | Second jobs earning above £50,270 |
| D1 | Additional Rate (45%) applied to all income | High earners (£125,140+) |
| K | Negative tax code – deductions exceed allowance | Those with taxable benefits |
| M/N | Marriage Allowance transfer | Married couples |
| T | Other adjustments apply | Unique circumstances |
| NT | No tax deducted | Non-taxable income |
How to Check Your Tax Code
You can check your tax code on:
Your payslip
Your P60 or P45
HMRC’s online tax account
If you think your tax code is incorrect, contact HMRC or speak with your accountant.
Why Might Your Tax Code Change?
Your tax code can change if:
Your income increases or decreases
You start a new job
You have multiple sources of income
You claim expenses or tax reliefs
HMRC adjusts your tax due from a previous year
Example of Tax Code Errors and Adjustments
Case 1: Overpaying Tax
Sarah changed jobs and received a BR tax code, meaning she was taxed at 20% on all earnings. She later corrected it with HMRC and received a refund.
Case 2: Underpaying Tax
John had a K tax code because he received private medical benefits from his employer. His tax code ensured extra deductions to cover the benefits.
What to Do If Your Tax Code Is Wrong?
Step 1: Check your tax code on your payslip or HMRC account
Step 2: Use HMRC’s tax code checker tool
Step 3: Contact HMRC (0300 200 3300) if you believe it’s incorrect
Step 4: Keep track of your earnings and allowances
Need Help Understanding Your Tax Code?
At Merranti Accounting, we help businesses and individuals:
Check and correct tax codes
Claim tax refunds if you’ve overpaid
Ensure compliance with HMRC regulations
