Tax Codes Explained
A tax code is an alphanumeric code used by employers and pension providers to calculate how much income tax to deduct from your pay under the PAYE system. Your tax code is determined by HMRC and reflects your personal tax allowances, adjustments, and any underpaid tax being collected.
The most common tax code is the standard L code: the current personal allowance divided by 10, followed by the letter L. It changes only when the personal allowance changes.
How Tax Codes Work
The number in your tax code represents your tax-free allowance. Multiply the number by 10 to get the annual tax-free amount.
| Tax Code | Annual Tax-Free Amount | Meaning |
|---|---|---|
| Allowance ÷ 10, then L | The full personal allowance | Standard personal allowance |
| 1100L | £11,000 | Reduced allowance (e.g., benefits in kind) |
| 500T | £5,000 | Further reduced allowance |
| 0T | £0 | No personal allowance |
Your employer divides the annual tax-free amount across pay periods. For a monthly-paid employee with code 1100L, for example, £11,000 ÷ 12 = £916.67 per month is tax-free.
Letter Suffixes
The letter at the end of your tax code indicates the type of allowance or how HMRC should adjust your code:
| Letter | Meaning |
|---|---|
| L | Standard personal allowance |
| M | You receive Marriage Allowance transferred from your partner |
| N | You have transferred part of your personal allowance to your partner under Marriage Allowance |
| T | Your tax code includes other calculations to work out your personal allowance |
| S | Scottish rate income tax applies |
| C | Welsh rate income tax applies |
The S and C prefixes come before the number (for example, S1100L or C1100L) and indicate that Scottish or Welsh tax rates apply to your non-savings income.
Special Tax Codes
Several tax codes have specific meanings and do not follow the number-times-10 rule:
BR (Basic Rate)
All income from this employment is taxed at 20% with no personal allowance. Commonly used for a second job where the personal allowance is already allocated to the first job.
D0 (Higher Rate)
All income from this employment is taxed at 40%. Used when basic and higher rate bands are used by another employment or pension.
D1 (Additional Rate)
All income taxed at 45%.
NT (No Tax)
No tax is deducted. Used in limited circumstances, for example for certain diplomats or when HMRC has determined no tax is due.
0T
No personal allowance is applied. Your income is taxed at the applicable rates starting from the first pound. HMRC uses 0T when:
- Your personal allowance has been used up by adjustments
- You have not provided your P45 or starter checklist to a new employer
- HMRC does not have enough information to issue a code
Unlike BR, the 0T code applies all rate bands progressively, so you are not overtaxed at 20% on all income — higher rate bands still apply where relevant.
K Codes
A K code means your deductions and adjustments exceed your personal allowance. Instead of receiving tax-free pay, the excess is added to your taxable income.
For example, K500 means £5,000 is added to your taxable income. This can happen when:
- You have significant benefits in kind (company car, medical insurance)
- You owe tax from a previous year being collected through your code
- State Pension adjustments push deductions above your allowance
Tax deducted through a K code is capped at 50% of your gross pay in any pay period to prevent excessive deductions.
Emergency Tax Codes
When you start a new job without providing a P45 from your previous employer, your new employer may apply an emergency tax code. This is typically the standard L code on a non-cumulative (Week 1/Month 1) basis.
On a non-cumulative basis:
- Each pay period is calculated independently
- No account is taken of earnings or tax paid earlier in the tax year
- You may overpay or underpay tax until your correct code is applied
Emergency tax codes are identified by adding W1 (weekly), M1 (monthly), or X after the code — for example, 1100L M1.
Once HMRC issues your correct code, any overpaid tax is automatically refunded through subsequent pay periods.
How HMRC Sets Your Tax Code
HMRC calculates your tax code using information from various sources:
- P45 from a previous employer
- P11D reporting benefits in kind
- Self-assessment returns
- State Pension information
- Marriage Allowance elections
- Underpaid tax from previous years
Common Adjustments
| Adjustment | Effect on Code |
|---|---|
| Company car benefit | Reduces allowance |
| Private medical insurance | Reduces allowance |
| State Pension | Reduces allowance |
| Underpaid tax from previous year | Reduces allowance |
| Marriage Allowance received | Increases allowance |
| Professional subscriptions | Increases allowance |
| Working from home allowance | Increases allowance |
| Gift Aid contributions | Extends basic rate band (not through code number) |
Checking Your Tax Code
You can check your tax code through:
- Personal Tax Account on GOV.UK — shows your current code and what makes it up
- Payslips — your tax code appears on every payslip
- P2 Coding Notice — a letter from HMRC explaining your code for the year (usually sent before April)
- P60 — your end-of-year certificate confirms the code used
What to Do If Your Tax Code Is Wrong
An incorrect tax code means you are either paying too much or too little tax. To correct it:
- Check your Personal Tax Account to see how your code is calculated
- Contact HMRC online, by phone (0300 200 3300), or through your Personal Tax Account to report the error
- HMRC will review and issue a corrected code to your employer
- Your employer will recalculate your tax for the year and adjust future payments
- If the code was wrong at year end, HMRC will issue a P800 tax calculation or send a self-assessment notice
Overpayment
If you have paid too much tax due to a wrong code, you will receive a refund either:
- Through adjusted PAYE deductions in subsequent pay periods
- Through a P800 refund after the tax year
- Through your self-assessment return
Underpayment
If you have paid too little tax, HMRC will either:
- Adjust your tax code for the following year to collect the shortfall (for amounts up to £3,000)
- Send a bill for amounts over £3,000
- Require a self-assessment return
Multiple Employments
If you have more than one job or receive multiple pensions, HMRC allocates your personal allowance to one employment (usually the highest-paying one). Other employments receive:
- BR — if all income falls within the basic rate band
- D0 — if basic rate band is already used
- 0T — if information is insufficient
You can ask HMRC to split your personal allowance across multiple employments if it better suits your situation.
Tax Codes and National Insurance
Tax codes only affect income tax deductions. National Insurance contributions are calculated separately for each employment based on earnings in that job alone. There is no equivalent of a tax code for NICs — the thresholds apply independently per employment.
This means that employees with multiple jobs may pay excess NICs during the year, which can be reclaimed from HMRC after the tax year ends.
Understanding your tax code helps ensure you pay the right amount of tax. Proper record keeping of your employment income, benefits, and allowances makes it easier to spot and resolve any tax code errors.