UK Tax Codes—What Do They Mean?

UK Tax Codes—What Do They Mean?

UK Tax Codes—What Do They Mean?

Imagine receiving your pay slip, and amidst the numbers and deductions, there’s a cryptic string of characters; 1257L, K345, or BR. It’s your tax code, a seemingly random jumble of letters and numbers that holds the key to how much of your hard-earned money stays in your pocket. But what do these codes actually mean? Are they secret messages from HMRC or just the government’s way of making payroll more complicated? In this guide, we’ll decode UK tax codes, showing you how to read them, understand their implications, and spot potential errors that could save—or cost—your hundreds of pounds.

Tax Codes

Tax codes consist of a mix of letters and numbers. Tax law is known for being complicated, but fortunately UK tax regulations are quite straightforward once you understand their functioning.

In the UK, tax codes are employed to determine the amount of income tax an employee is required to pay. The code informs the employer regarding the tax amount to withhold from the individual’s salary or pension.

HM Revenue & Customs (HMRC) provides tax codes. However, it remains crucial for them to be reviewed periodically, particularly if an employee’s situation was subject to change. For instance, they begin putting in additional hours. If the tax code is incorrect, it may lead to them paying more tax than necessary.

Does self-employed person receive a tax code?

No, individuals who are self-employed do not get a tax code; instead, they are given a UTR (Unique Taxpayer Reference). This UTR is a distinct number given to you that remains constant. Since self-employed individuals don’t earn a salary, it’s not feasible to calculate their fixed PAYE contributions. Individuals who are self-employed file a Self-Assessment Tax Return each fiscal year and are required to pay taxes accordingly. Your UTR remains constant, regardless of whether you stop being self-employed for a while and then resume self-employment afterward. You will maintain your existing UTR.

Tax Deduction for employed Individuals

If you work under PAYE (Pay as You Earn) as the majority of the UK workforce does, your employer will automatically withhold taxes from your salary. Tax codes indicate your allowances and exemptions, so understanding them is important. High-income individuals frequently utilize salary sacrifice programs to boost their pension contributions and lower taxable income.

Where do I find my tax code?

Where do I find my tax code

In contrast to self-employed individuals, you will possess a tax code for every income source you maintain, which may change often. You will discover each of these codes in one of the subsequent locations:

  • A letter delivered to you from HMRC informing you about your tax code.
  • Available on the HMRC website.
  • Within the HMRC mobile application.
  • On your salary statement.

What does HMRC Tax Code Indicate?

An employer utilizes tax codes to decide the amount of income tax to subtract from total earnings. The tax code is made up of a tax code number along with a tax code letter.

  • The tax code number reflects the amount of tax-free Personal Allowance and considers any income that hasn’t been taxed yet (like untaxed interest or part-time wages) along with the worth of any employee perks such as a company car.
  • The tax code letter shows how the tax code is applied.

Tax Codes Explained

Letter Interpretation
L You’re entitled to the standard tax-free Personal Allowance
M Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal Allowance
N Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner
T Your tax affairs need to be reviewed by HMRC because they’re complicated. Your Personal Allowance is determined by the numbers that come before the letter (provided it doesn’t follow a 0).
0T You don’t qualify for the Personal Allowance. This is typically because you earn over £125,140 per year, or your employer doesn’t have enough information to assign you another code.
BR Applied to pay slips where you’re not eligible for the Personal Allowance. This is because this income is considered a second job. With this tax code, you’ll pay the basic rate of tax (20%) on the whole sum. It can also apply to some pensions.
D0 Similar to the tax code above, all income is taxed at the higher rate of 40% (known as the intermediate rate if you live in Scotland, which is 21%). It usually applies to second jobs and some pensions.
D1 A variation on the D0, SD0 and CD0 codes, this income is taxed at the additional rate of tax at 45% (41% for Scottish residents). The code usually applies to second jobs or pensions.
K If your tax code has a ‘K’ at the beginning, it means you owe tax from a previous year and need to make up the difference.
NT You’re not paying any tax on this income
S Your income or pension is taxed using the rates in Scotland
C Your income or pension is taxed using the rates in Wales
W1, M1, or X A set of (usually) temporary tax codes that apply when you’ve started a new job, or your circumstances have changed significantly. HMRC will use emergency tax codes until they can work out how much you owe.

 

Emergency tax code letters—W1, M1, and X

If you have just begun a new job, transitioned from being self-employed to employee status, or started to receive company benefits or the state pension, HMRC will issue you an emergency tax code letter as it determines the correct tax code for you.

  • W: This emergency code is designated for individuals who earn a weekly salary.
  • The M1 emergency code applies to those who receive a monthly salary.
  • X: HMRC applies this code when it lacks clarity on which category to assign you.

While HMRC offers an online tool to help you comprehend your employees’ tax codes, it does not include a thorough explanation of all codes, which limits your ability to evaluate whether a different code might be more appropriate for you. Best Chartered Accountants are a great help to lead you through the complexities of Tax codes and other tax laws.

Modifications to HMRC tax codes in 2025

PAYE has undergone certain modifications that affect high-income individuals and those repaying student loans. Here’s a brief overview:

  • Personal allowance: The personal allowance stays at £12,570, indicating that the standard tax code for the 2025/26 tax year will continue to be 1257L as it is now.
  • Tax rates: All tax rates stay the same at 20%, 40%, and 45% (47% in Scotland) for the applicable tax brackets.
  • Tax brackets: All tax band limits stay the same, with the thresholds set at £37,700 and £125,140 of taxable income, meaning after subtracting the personal allowance.
Taxation and Compliance Services in London, UK

For all companies, navigating the rough tides of taxation is critical. The worst part about handling tax is the ever-changing tax compliance rules. This is where the expertise of our professional accountants comes in. As a top accounting consultancy in London, we, at SSCO Global offer comprehensive tax compliance services in the UK. With us, managing your company taxes will never be a problem.