Understanding the list of tax codes and what they mean can be very challenging for small businesses. In many cases, the responsibility usually falls on individuals without specialised training or with tons of company burden, such as a self-managing owner or a senior employee.
Unless they hand this aspect over to payroll experts, it is crucial for employers to familiarise tax codes to prevent confusion, legal issues, and potentially hefty penalties from HMRC. Read on to grasp the basics of UK tax codes.
Understanding UK Tax Codes
The Pay as You Earn (PAYE) system applies to UK employees, where taxes are deducted at source. To ensure correct tax payment, HMRC issues alphanumeric tax codes, which employers and pension providers must use to determine how much income tax should be deducted from an employee’s salary or state pension.
The numbers in a tax code represent the tax-free income an individual is entitled to, and the letters indicate their tax situation based on employment status. Accurate tax coding is crucial to ensure the right amount of P.A.Y.E. tax is withheld, preventing underpayment or overpayment.
Take, for example, the most common tax code for UK employees—1257L. The number represents the current tax year’s standard tax-free allowance of £12,570, and L means the taxpayer is eligible for this personal tax allowance. This tax code usually applies to an individual’s primary job and cannot be used for the secondary source of income, in case the employee takes on a second job.
Employers are responsible for familiarising the list of tax codes and what they mean HMRC as they are expected to assign correct tax codes to new hires every time. They may check the applicable tax code in the employee’s P45 form or ask them to complete the Starter Checklist (usual option for first-time employees, such that they were previously self-employed, or it is their first time having a job, or if they lost their P45).
Tax codes can change in a financial year, and it is important for employers to stay updated. HMRC will notify employers of any changes, which can be viewed online if using the HMRC PAYE Online service.
List of Tax Codes and What They Mean UK
Here is a list of tax codes and what they mean UK by letters:
- L. This represents the standard personal allowance. The most common tax code, 1257L, consists of this letter, indicating an employee is entitled to the standard tax-free personal allowance, which, for the current tax year, is £12,570 for many people. This applies to employees with one job or pension.
- M. This tax code stands for marriage allowance, designed to reduce the tax bill of married couple or civil partners. M specifically applies to the recipient (always the higher-earning partner) when they have received a transfer of 10% of their partner’s personal allowance. For the 2024/25 tax year, the transferable amount is £1,260, just above 10% of the current personal allowance of £12,570.
- N. Another marriage allowance tax code but for the transferor. It shows in the lower-earning partner’s tax code when they have transferred 10% of their personal allowance to the other.
- T. When other calculations are required to determine the employer’s personal allowance, this letter is shown. This tax code is typically used for complex tax situations.
- 0T. This does not mean ‘zero’ tax, but rather, no personal allowance. This tax code usually applies when an employee’s personal allowance is used up or when they start a new job without sufficient tax code details. Since no personal allowance is applied, all income is taxed.
- NT. This indicates that ‘no tax’ is deducted from income. The tax code is often used for non-UK residents to avoid double taxation or for businesses facing bankruptcy.
- K. This is a ‘negative’ tax code, which means the untaxed income exceeds the personal allowance. Some incomes usually get untaxed when the employee pays their previous tax year’s levy through their wages or private pensions, or they get some benefits (e.g., government benefits or company benefit-in-kind).
UK Regional Tax Codes
Here is a list of tax codes and what they mean UK by letters:
Tax rates in the UK are represented in the following tax codes:
- BR – Basic Rate
- D0 – Higher Rate
- D1 – Additional Rate
Specifically, the tax codes above apply in England and Northern Ireland.
Scottish employees or pension holders will have an S for a prefix in their tax code, which stands for ‘Scotland,’ but with a slight difference as they currently have six tax bands. Wales, however, will show a C prefix, which stands for Cymru (means Wales in Welsh). The table below shows a quick comparison of tax bracket codes and their rates in the UK regions:
| UK Region | England & Northern Ireland | Scotland | Wales |
|---|---|---|---|
|
Tax Codes for Brackets |
BR – Basic Rate (20%) D0 – Higher Rate (40%) D1 – Additional Rate (45%) |
S0T – Starter Rate (19%)
SBR – Basic Rate (20%) SD0 – Intermediate Rate (21%) SD1 – Higher Rate (42%) SD2 – Advanced Rate (45%) SD3 – Top Rate (48%) |
C0T – Personal Allowance
CBR – Basic Rate (20%) CD0 – Higher Rate (40%) CD1 – Additional Rate (45%) |
If it is an employee’s first job, the tax code will usually show as 1257L. Scottish employees will have S1250L, as it is C1250L for Welsh taxpayers. Above tax codes usually apply on second jobs. For more information about second job tax, read How Much Tax Do You Pay on a Second Job?
S0T and C0T apply when the personal allowance is used up, and the new employer does not yet have sufficient information to give the employee a tax code.
Check out our updated guide on income tax rates and National Insurance contributions too: Income Tax Rates 2024/25.
Emergency Tax Codes
When HMRC lacks sufficient information to assign a correct tax code, emergency tax codes are used as placeholders. Usually, this happens when an employee’s income details are unclear due to circumstances like starting a new job, transitioning from self-employment, or receiving state pension or company benefits.
Emergency tax codes indicate how much tax-free income employees can receive until accurate information is provided. They appear at the end of a tax code as:
- W1 – Stands for Week 1. This is applied to weekly pay, giving only one week’s proportion of the annual allowance.
- M1 – Stands for Month 1. This is applied to monthly pay, like W1, but monthly.
- X – This indicates an unknown tax code, used when pay periods are irregular, not even weekly or monthly.
Below are some examples of how emergency tax codes are applied:
- 1257L W1
- 1257L M1
- 1257L X
Employers should promptly update HMRC with correct employee details to ensure tax codes are accurate and employees are taxed correctly. This helps avoid unnecessary deductions and ensures compliance with tax regulations.
UK Tax FAQs
1257L is the most common tax code in the UK, which means an individual is entitled to the current personal tax allowance of £12,570.
Tax codes usually show in the employee’s payslip. Other means to check the tax code may be through the HMRC app or a ‘tax code notice’ from HMRC.
The three common types of direct taxes are income tax, National Insurance, and capital gains tax. Corporation tax is also a direct tax, but it is paid by UK businesses.
If an employer in the UK fails to pay taxes under PAYE, HMRC may require the employee to pay the owed income tax and NIC. Additionally, the employee might lose out on state benefits if NIC is not paid.
With the prefix S, this is a tax code in Scotland. The most common example of how it is used is SK100, where the pay adjustment is added to the taxable pay rather than subtracted. This increases the amount of earnings on which tax is calculated.
Streamline Payroll Management with Legend Financial
Knowing the list of tax codes and what they mean is just the beginning. As an employer, you will also need to sit down with the constant tax updates, accounting software integration, payroll, and more unless you have a tax accountant in place.
Getting tax codes wrong can cost huge for your business. This is where Legend Financial comes in. We are a tax, accountancy, and business development firm in the UK with over ten years of experience in the field. You can outsource our payroll specialists anytime. Talk to us today!
