Tax codes. A weird mix of letters and numbers that are really quite useful for employers to understand tax codes in order to run payroll and pay both the employee and HM Revenue and Customs (HMRC) the correct amount. HMRC will inform you about which code to use but if you are new to payroll, or simply want a refresher, read on to better understand tax codes. This short guide includes information such as what tax codes mean and a breakdown of the different tax codes in the UK.

What do UK tax codes mean?

Tax codes tell the employer how much tax to deduct from the person’s salary or pension. The codes are issued by HMRC so after adding the tax code to the employee’s profile on whatever payroll system you use, that should be it unless you receive another notification from HMRC. However, it’s a good idea to check that you are using the correct code especially if your employee changes their working hours, or experiences a life event. If an incorrect tax code is used, your employees could pay too much or too little tax, which can cause hardship for the employee and may be time consuming for you to sort out the problem.

How to identify your employees’ tax code

When an employee starts working for your company, you are able to see their tax code on their P45 form. HMRC may amend this code once they have processed that the person has joined your company so keep an eye out for updates – as the employer, it’s your responsibility to make sure you deduct and pay the correct income tax for your staff.

If the employee has a P45 form:

• Request a completed P45 form from the employee. A P45 form contains personal details including total pay received and total tax paid to date in that tax year. It also contains their tax code. 
• Visit gov.uk to ensure that the tax code shown is the correct one to use. 

If the employee doesn’t have a P45 form then you will need to ask the employee for their personal details including full name, address, student loan information, and National Insurance number.

• The employee will need to complete the online HMRC Starter Checklist
• Use the information from the checklist and go to the gov.uk page to find the correct tax code. Select ‘‘You do not have their P45′ when asked for the date that the employee left their previous employment.

The UK tax codes and what they mean

Tax codes are made up of both letters and numbers.

The numbers tell the employer or pension provider the maximum amount the employee can earn before paying tax – it is normally the amount you can earn divided by 10. This is calculated by HMRC based on the person’s personal allowance and any other untaxed income they get. 

The letters indicate how much tax the employee must pay.  More details are in the table below. It also allows HMRC to communicate to employers about changes to tax code, for example, HMRC may issue guidance that all ‘L’ tax codes should be updated to LXXXX to reflect updated personal allowance amount. 

DID YOU KNOW?

One of the most common tax codes in the UK is 1257L. 

If your tax code ends in an L

This tax code is used for people who have one job or pension. The L means they are entitled to the standard tax-free personal allowance.  Most people will be able to earn £12,570 before tax, which means their tax code will be 1257L.

If your tax code ends in an M or N

These codes represent anyone who has the Marriage Allowance. Couples who are married or in a civil partnership can transfer 10% of their personal allowance to their partner (as long as they meet the criteria). The partner receiving the extra allowance will have the M rather than the normal L, while the other partner will have N.

If your tax code is BR or the letter D followed by a number

These codes usually mean that your employee has more than one source of income such as a second job, pension or money paid out by investments. If their main income source is more than their personal allowance (for most this is £12,570), the second salary/income will be subject to tax in its entirety.

BR means all of their second income is taxed at the basic rate (20%), whilst D relates to a higher rate (40%).

If your tax code starts with K

This means your employee is likely to be paying tax owed from a previous year, which is of a greater amount than their personal allowance. They might also have this code if they receive state or work benefits, like the state pension or a company car, and tax is needed to be paid on these benefits.

The amount they are taxed under the K tax code cannot be more than half the amount they earn in that pay period (whether that’s monthly or weekly).

If your tax code ends W1 or M1 or X at the end

This means your employee is on an emergency tax code. For example, if they have started a new job and you are unsure about the correct tax code might not have been worked out before your first payday. 

If your employee tells you they are on an emergency code, send all relevant details to HMRC and obtain the correct code as soon as possible to support your team. 

There are different tax codes in use in Scotland and Wales.

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