A tax code is simply a series of numbers and letters, for example 1257L, S1257L, C1257L, BR, and K497.

If you’re a full or part-time employee, or receive a private pension, these hieroglyphics are used by your employer(s)or pension providers to calculate the amount of tax that should be deducted from your wages or pension before it’s paid into your bank account.

Thisis known as the pay-as-you-earn (PAYE) system, though not everyone is taxed inthis way. You won’t have a tax code if you’re fully self-employed, unemployedor you only receive the state pension. 

How do I find my tax code?

Each income you have (jobs, private pensions) will have a different tax code. Remember to check them all. Here are the best places to look for your tax code(s).

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Where to look for your tax code:

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Payslip – Ask your employer if you can’t locate your latest one.

PAYE coding notice (or P2) – Sent around January to March, before the start of the tax year. It explains how your code was generated.

P45 – The form your employer gives you when you stop working for it – and the one you give to your new employer when you change jobs.

P60 – An annual summary of your salary and the tax that’s been deducted. Your employer is required to give you this at the end of each tax year.

Pension advice slip – If you’re receiving a private pension, the easiest place to find your code will be on any pension advice slip or on your P60 sent once a year.

HM Revenue & Customs (HMRC) – You can check your tax code with HMRC online. 

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What your tax code means

Your tax code will usually be made up of letters and numbers. Let’s take a common example – if you’ve got one employer, no work perks (such as a company car), live in England/Northern Ireland and earn under £100,000, your code for the2022/23 tax year should be:  

The letters and numbers indicate different things…

Numbers show the amount you can earn tax-free (your personal allowance)

You need to add a zero to get the real number, so 1257 means you can earn £12,570 a year tax-free – that’s the amount you can earn in a year before your employer needs to deduct tax. This is called your personal allowance.

The size of this allowance depends on your income and whether there are any deductions (for example, benefits at work such as a company car, discounted rent or medical insurance) or additions (such as working-from-home tax relief). Above this allowance, you pay tax on income, though the amount you pay depends on your total earnings (see current tax rates).

Note that universal credit and working tax credit are classified as ‘means-tested’ benefits, so are not deducted from your individual personal allowance. See our full Universal credit and Tax credit guides for more help.

Letters relate to your situation and how it alters your personal allowance

Usually, the letters come at the end of your tax code, but if you live in Scotland, you’ll also have an S at the start (for example, S1257L) or a C if you live in Wales (C1257L). Find the letter(s) from your tax code in the table below to see if the definition rings true. If it doesn’t, it could indicate there’s a mistake. 

What the letters in your tax code mean:

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L – You’re entitled to a tax-free personal allowance. For those earning under £100,000with no taxable perks (such as a company car) this should be £12,570 for2022/23.

0T (orS0T or C0T) – You’re not entitled to any tax-free personal allowance and all income is taxed in line with income tax bands. It’ soften a code you’re put on when your employer doesn’t have enough information about your previous employment, or you earn more than £125,140.

BR (or SBR or CBR) – You’re not entitled to any tax-free personal allowance on income from this job or pension and pay 20% basic-rate tax on the whole amount. This is often used fora second job or pension, as it assumes your personal allowance is used on your main income. It’s important to ensure HM Revenue & Customs (HMRC)knows which is your MAIN job (generally the one that pays you most) as if it’s the wrong way round, it can cause problems.

D0(orSD0 orCD0) – You’re not entitled to any tax-free personal allowance and all income is taxed at the40% higher rate (21% intermediate rate in Scotland). This is often used for a second job or pension.

D1(orSD1 orCD1) – You’re not entitled to any tax-free personal allowance and all income is taxed at the45% additional rate (41% higher rate in Scotland). This is often used for a second job or pension.

SD2 – This is only used in Scotland and shows you’re not entitled to any tax-free personal allowance and all income is taxed at the 46% Scottish top rate. Again, it’ soften used for a second job or pension.

K – Your personal allowance has been eroded down to LESS than nothing, meaning the number after the K is actually a negative personal allowance. This can happen if you have income that isn’t being taxed another way and is worth more than your personal allowance, such as paying back tax from a previous year, or getting work benefits that you have to pay tax on (and they’re worth more than, or you’re not entitled to, your personal allowance).

M or N – You’ll have this at the end of your tax code if you or your spouse/civil partner have received (M) or given (N) the marriage tax allowance. This allows non-taxpayers to transfer £1,260 of their personal allowance to their basic-rate tax-paying spouse or civil partner. Full help in Marriage tax allowance.

NT – No tax is paid on this employment or pension income. 

T – If a T follows a number that isn’t zero, it means you do get a personal allowance, which is dictated by that number. However, it also means your tax affairs need to be reviewed by HMRC, which typically happens if they’re complex.

Emergency tax codes:

W1, M1 or X – These may come after a normal looking tax code, for example 1257L W1. Typically, this happens if there’s a delay in HMRC receiving details about a change in your circumstances, for example if you’ve just started a new job.

Check if your tax code is correct

There are millions of errors, so never assume your code is correct. Anyone can be affected, but you should take action quickly if one of the following situations has applied to you in the recent past.

• Changed jobs? HM Revenue & Customs (HMRC) can incorrectly assume you have two jobs if your former employer hasn’t let it know you’ve moved on.
• Have more than one income? If you’ve been earning money from more than one source (for example, a second job), you could find you’ve been taxed incorrectly on a chunk of your earnings.
• Receive employee benefits? If part of your salary is made up of company benefits such as a company car, healthcare cash plan or medical insurance, it’s possible you’re being taxed wrongly.

• Just started your first job? Young people embarking on a first job in the middle of a tax year can easily be shunted on to an emergency tax code. Never assume the amount you receive in the first few pay packets is correct.
• Have more than one pension or recently retired? If you receive money from more than one pension source, have retired in the last couple of years or have recently started to receive the state pension, you could have been taxed erroneously.

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In search of additional information? Look to Cangaf Ltd. Contact us today for a complimentary quote, and we’ll address your accounting concerns effectively!