As an employee, it is very important to check and understand your tax code. Most of us just assume that our tax code will be correct however sometimes this is not the case. It could mean the difference between paying too much or too little tax.
Why do you have a tax code and what is it?
PAYE tax codes are made up of numbers followed by a letter. You have a tax code as part of the pay as you earn (PAYE) system. Your tax code tells HMRC how much tax you should be paying. Your tax code can change at any time due to your circumstances. A tax code isn’t unique to each individual person; many people have the same tax code for example 1150L.
How to check your tax code
The easiest way for you to check your tax code is to have a look at your payslip. It will also be on the P60 you get after the end of the tax year and P45 if you change jobs.
List of Tax Code Letters
Each tax code letter has a specific meaning:
L – You are entitled to the standard tax-free personal allowance (see below for more information)
M – You have received a 10% Transfer of your partners Personal Allowance (You can read more about marriage allowance here)
N – You have transferred 10% of your personal allowance to your partner
S – This means your income or pension is being taxed using Scottish rates
T – This is used when other calculations are being used to work out your personal allowance. An example for this may be if your annual income is more than £100,000 and your personal allowance has to be reduced
0T– All your personal allowance has been used or you have started a new job and your employer doesn’t have the details they need to give you a new tax code.
BR – BR stands for basic rate. All income for this job is taxed at 20%. This usually applies if you have more than one job or pension
D0– All your income for this job or pensions is taxed at the higher rate of 40%; this is usually due to having more than one job or pension.
D1 – All income from this job is taxed at the additional rate of 45%. This is also usually due to having more than one job or pension.
NT – This means you are not paying tax on this income
K – K in your tax code means deductions are usually due for company benefits, pension or tax from a previous year and this amounts to greater than your personal allowance
W1 & M1 – These stand from week one and month one. These are placed alongside your tax code to signify the tax is calculated only on the current tax period (paid either weekly or monthly) rather than the entire year, making it non-cumulative
How your tax code number is worked out
The numbers on your tax code are worked out by adding up any income that you haven’t paid tax on and the value of any benefits from your job (e.g. a company car). The income that you haven’t paid tax on is then taken away from your personal allowance (currently £11500). What’s left is the tax-free income you’re allowed in a tax year. This amount is divided by 10 and the relevant letters are added to inform employers, pension providers or any other financial services about how much tax-free income you are entitled to in that tax year.
For example, 1150L is currently the most common tax code for the 2017/18 tax year. 1150 refers to their tax-free personal allowance of £11500 which is then divided by 10 to get 1150.
Since the personal allowance for the 2018/19 tax year (beginning on 6th April 2018) will be £11850, 1185L will be the most common tax code.
However, this process is different if you have the letter K in your tax code
Any earnings over and above your personal allowance will be taxed as follows:
- 20% on earnings up to £33,500 (or up to £31,500 in Scotland)
- 40% on earnings between £33,501 and £150,000 (or from £31,501 in Scotland)
- 45% on earnings above £150,000
If you think your tax code it wrong it is important to contact HMRC straight away to avoid paying too much tax. For more information on tax codes, you can visit the HMRC website here.