Understanding HMRC PAYE Tax Codes: A Simple Guide

If you receive a salary or pension in the UK, you’ve probably seen a tax code on your payslip. Most people have virtually NO idea what these numbers and letters actually mean? However, understanding your tax code is key to ensuring you're paying the correct amount of tax. In this post, we’ll break it down in simple terms.

By way of background, the UK’s Pay As You Earn (PAYE) system has been around since 1944 and was introduced to make tax collection easier for employees and employers. Obviously, it also gave the state’s coffers a more regular cash flow.

Over the years, the PAYE system has been changed and is now quite sophisticated using a tax code that tells your employer or pension provider how much tax to deduct each month and reporting any salary type payments instantly to HMRC

A tax code is a combination of numbers and letters used by HMRC to calculate how much income tax should be deducted from your earnings or pension. If your tax code is incorrect, you could end up paying too much or too little tax.

Most people in the UK will have a tax code that looks something like this: 1257L. But what does it mean?

• Numbers – These represent your tax-free personal allowance (the amount of income you can earn before paying tax). Multiply this number by 10 to get the total tax-free amount. For example, 1257 means you can earn £12,570 before tax.

• Letters – These indicate any special circumstances that affect your tax.

Your tax code may change due to:

• A salary increase or decrease.

• Starting a new job.

• Receiving additional income (e.g., rental income, benefits, or a second pension).

• Claiming or losing tax reliefs like Marriage Allowance.

• Changes in government tax thresholds.

  
  

If you think your tax code is incorrect, you should:

1.    Check your payslip, P45 (if you’ve left a job) or P60 (end-of-year tax summary) to see your current tax code.

2.    Use HMRC’s online Check Your Income Tax tool on the government website.

3. Contact HMRC directly via phone or online to query or update your tax code.

Your tax code plays an essential role in making sure you pay the right amount of tax but HMRC are not always correct! By understanding what the code means and how it is calculated, you can avoid overpaying or underpaying tax. If you’re ever unsure, checking your tax code and speaking to HMRC can help keep your finances on track.

Common Tax Code Letters

Here are some of the most frequently used tax code letters and what they mean:

• L – You’re entitled to the standard personal allowance.

• BR – You are taxed at the basic rate (20%) on all income from this job or pension, usually because you have multiple sources of income.

• D0 – You are taxed at the higher rate (40%) on all income from this job.

• D1 – You are taxed at the additional rate (45%) on all income from this job.

• M – You’ve received a Marriage Allowance transfer from your spouse or partner.

• N – You’ve transferred part of your personal allowance to your spouse or partner.

• NT - You are not paying any tax on this income.

• T – HMRC needs to review your tax code because of additional factors.

• 0T - Your Personal Allowance has been used up, or you have started a new job, and your employer does not have the details they need to give you a tax code.

• K – You have taxable benefits (such as a company car) or unpaid tax from previous years that reduce your personal allowance.

• S - Your income or pension is taxed using the rates in Scotland.

• S0T - Your Personal Allowance (Scotland) has been used up, or you have started a new job, and your employer does not have the details they need to give you a tax code.

• SBR - All your income from this job or pension is taxed at the basic rate in Scotland (usually used if you have more than one job or pension).