Tax codes explained: everything you need to know about paying UK Income Tax
Understanding tax codes can seem challenging, until you learn how they work. In this guide, we’ll break down tax codes, helping you discover how they impact your income.
This article is not advice. If you would like to receive advice on your savings and investments, consider speaking to a Financial Adviser.
Tax codes determine how much you owe HMRC. Get the wrong UK tax code on your payslip, and you could end up with hundreds less in income each month. If you understand how tax codes work, you can catch and correct any errors to ensure you’re paying the right amount.
In this guide, we break down tax codes, explain what they mean for your finances, and show you how to correct issues quickly.
Tax codes explained
Tax codes are made up of a combination of numbers and letters. Tax law is notoriously complex, but thankfully UK tax codes are relatively easy to understand once you know how they work.
For example, the tax code 1257L might look confusing at first glance. But if you place a 0 at the end, you get £12,570 – the tax-free income allowance for the year. The letter ‘L’ means you’re entitled to the tax-free Personal Allowance.
As a result, the tax code 1257L is one of the most common codes you’ll see on UK payslips.
What do tax codes cover?
Certain work benefits, like company cars, can affect how your income is calculated, and may reduce your tax-free Personal Allowance. Other benefits, such as bonuses, can also influence your tax code and the amount you pay. If you’re unsure about how your benefits impact your tax code, it’s a good idea to speak with your HR department.
HMRC considers pensions as income, so tax codes apply when you withdraw money for your retirement savings.
How do you pay tax if you’re employed?
If you’re employed under PAYE (Pay As You Earn) like most of the UK workforce, your employer will automatically deduct tax from your wages. Tax codes show your allowances and exemptions, so understanding them can help clarify your tax situation.
For example, if you earn a salary of over £125,140 per year, your tax code is either 0T, S0T, or C0T. This means you’re not entitled to any tax-free Personal Allowance.
High earners often use salary sacrifice schemes to increase their pension savings and reduce taxable income.
What are all the tax codes in the UK?
We’ve listed the various tax codes below and assigned general categories to help explain when they usually apply.
These categories serve as a guide and may not cover the specifics of your financial situation. If you’re unsure whether your tax code is correct, consider speaking to a Financial Adviser for personalised guidance.
| Tax code | Meaning | Category |
| L | Entitles you to the standard tax-free Personal Allowance. | Personal Allowance |
| 0T | You don’t qualify for the Personal Allowance. This is typically because you earn over £125,140 per year, or your employer doesn’t have enough information to assign you another code. | Personal Allowance |
| T | Your tax affairs need to be reviewed by HMRC because they’re complicated. Your Personal Allowance is determined by the numbers that come before the letter (provided it doesn’t follow a 0). | Personal Allowance |
| BR | Applied to payslips where you’re not eligible for the Personal Allowance. This is because this income is considered a second job. With this tax code, you’ll pay the basic rate of tax (20%) on the whole sum. It can also apply to some pensions. | Second jobs/pensions |
| D0 | Similar to the tax code above, all income is taxed at the higher rate of 40% (known as the intermediate rate if you live in Scotland, which is 21%). It usually applies to second jobs and some pensions. | Second jobs/pensions |
| D1 | A variation on the D0, SD0 and CD0 codes, this income is taxed at the additional rate of tax at 45% (41% for Scottish residents). The code usually applies to second jobs or pensions. | Second jobs/pensions |
| K | If your tax code has a ‘K’ at the beginning, it means you owe tax from a previous year and need to make up the difference. | Negative balance |
| M or N | You can transfer up to 10% of your Personal Allowance to a spouse or civil partner. The person that receives this is marked with an ‘M’, whereas the person that donated their allowance to their partner is noted with an ‘N’. | Marriage and civil partnerships |
| NT | No tax is due on this income. | Full exemption |
| W1, M1, or X | A set of (usually) temporary tax codes that apply when you’ve started a new job, or your circumstances have changed significantly. HMRC will use emergency tax codes until they can work out how much you owe. | Emergency tax |
| S or C | You’re based in either Scotland (S) or Wales (C). If neither letter is at the start of your tax code, you’re based in England or Northern Ireland. | Location |
Tax codes at a glance: key points
There are two key points to note based on the tax codes listed above:
1. Second jobs
If you have more than one job, HMRC needs to know your main source of income – typically the one that pays more. Your second job will generally be taxed on the full amount earned, though the rate will vary depending on your circumstances.
2. Pensions
You can withdraw your pension either in stages or as a lump sum. Since pensions are treated as taxable income in retirement, withdrawing funds in a tax-efficient way is important. For example, you may be able to take a 25% tax-free lump sum, but further withdrawals will be taxed based on your Income Tax bracket.
How do I know if I'm on the right tax code?
If you’re working as a PAYE employee your payslip, P60, or P45 documents are the quickest ways to check your tax codes. If you have a private pension, you’ll get a P60 statement every year.
You can also look up your pension advice slip to check your tax code if you’re retired.
What to do if your tax code is wrong
If you believe your tax code is incorrect, contact HMRC. Tax codes are ultimately the taxpayer’s responsibility, even if they’re assigned incorrectly by an employer. Acting quickly will help ensure you’re paying the correct amount of tax.
HMRC offers some online services where you can update your circumstances. For confidential support, you’ll need to call or write to them.
You can call HMRC on 0300 200 3300, Monday to Friday, from 8am to 6pm (closed on bank holidays and weekends).
Emergency tax codes explained
When your circumstances change, such as starting a new job, HMRC might take some time to update your tax code. During this time, an emergency tax code will be applied temporarily to make sure enough tax is taken from your pay until they confirm the correct code.
Ask HMRC for a rebate if you've overpaid. If you don’t claim your refund online within 21 days, HMRC sends you a cheque in the post. To avoid delays, make sure HMRC has your current address.
Decoding UK tax codes
Getting your tax code right is essential if you want to safeguard your finances. Although tax law can be confusing, understanding the structure of tax codes means you can quickly respond to costly errors.
By checking whether you have the right UK tax code, you can focus on your long-term financial goals, like earning more from your savings.
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