A tax code tells your employer or pension provider how much Income Tax to deduct from your pay or pension. Each source of income has its own tax code, which HMRC creates and issues.
Therefore, if you have more than job or pension, you will receive more than one tax code. This allows HMRC to spread your allowances correctly across your income.
What a Tax Code Looks Like
A tax code includes both numbers and letters. The most common tax code is 1257L.
- The numbers show how much tax-free income you can earn
- The letters explain your personal tax situation
In this instance, the number “1257” represents £12,570 of tax-free income. The letter “L” confirms that you receive the standard Personal Allowance.
While this format looks simple, small changes can affect how much tax you pay.
What the Numbers Mean
The numbers in your tax code reflect your tax-free Personal Allowance. HMRC starts with your standard allowance and then adjusts it based on your circumstances.
They may reduce your allowance if you:
- Receive company benefits (such as medical insurance or a company car)
- Owe tax from a previous year
- Earn untaxed income (such as savings interest)
If your allowance were to drop to £11,000 due to benefits, your tax code becomes 1100L. As a result, you pay tax on a larger portion of your income.
What the Letters Mean
The letters in your tax code provide extra detail about your situation. They show how HMRC applies your allowance and tax rates.
The most common letters include:
| L | You receive the Personal Allowance |
| M | You receive Marriage Allowance from your partner |
| N | You transfer Marriage Allowance to your partner |
| T | Your code includes additional calculations |
| BR | All income gets taxed at the Basic Rate |
| D0 | All income gets taxed at the Higher Rate |
| NT | You do not pay tax on this income |
Where You Can Find Your Tax Code
You can check your tax code in several places, such as:
- On your payslip
- Through the HMRC app
- In your online personal tax account
- On a tax code notice letter from HMRC
This makes it easy to stay informed throughout the tax year. Moreover, the online service allows you to view previous tax codes. You can also sign up for paperless updates, which means you receive email notifications when your code changes.
Why Your Tax Code Changes
Your tax code may change when your income or personal situation changes. HMRC updates your code using information from employers and pension providers.
Common reasons for a change include:
- Starting a new job
- Beginning to receive a pension
- Receiving company benefits
- Claiming Marriage Allowance
- Earning additional income from another job
In some cases, your savings interest or State Benefits may also affect your code. Therefore, changes do not always relate to your main job. Although HMRC updates codes automatically, mistakes can still happen. For this reason, you should review your code regularly.
Having Multiple Tax Codes
It is not uncommon to have more than one tax code. This usually applies if you have multiple jobs or receive a pension alongside employment. Each income source receives its own tax code. This allows HMRC to apply your allowances correctly and avoid underpayment.
However, you should check that your main allowance sits with your primary income. This can help stop you from paying more tax than necessary.
Emergency Tax Codes
Emergency tax codes apply when HMRC does not have enough information about your income. These codes often appear when you start a new job or begin receiving new benefits.
You can recognise an emergency tax code if it ends in:
- W1
- M1
- X
Emergency codes calculate tax based only on your current pay period. As a result, they do not consider your total income for the year. This can lead to overpaying or underpaying tax. However, HMRC usually corrects this once they receive your full details.
To avoid this, you should provide your employer with a P45 or complete a starter checklist as soon as possible.
The “K” Tax Code
A “K” tax code means your deductions exceed your Personal Allowance. In other words, you have additional income or benefits that require tax.
This may occur if you:
- Receive taxable benefits (such as company car)
- Owe tax from a previous year
- Receive State Pension or other untaxed income
- Earn more interest than your Personal Savings Allowance
Your employer collects this tax through your wages or pension. However, they cannot deduct more than half of your pre-tax income.
If Your Tax Code Is Wrong
You should check your tax code regularly to avoid problems. If you notice anything unusual, you should act immediately.
You can correct your code by:
- Signing into your online tax account
- Reviewing your income, benefits and expenses
- Updating any incorrect or missing details
If necessary, you can contact HMRC directly. Additionally, providing your employer with a P45 can help update your records quickly. Once HMRC updates your details, they will issue a new tax code. Your employer should then apply this code within a few pay periods.
If You Pay the Wrong Tax
If you pay too much tax, HMRC will arrange a refund. In most cases, your employer includes this refund in your pay.
If you pay too little tax, HMRC will adjust your tax code. This adjustment spreads the balance over future pay periods.
After the tax year ends, HMRC reviews your income records. They then confirm whether you paid the correct amount. HMRC may also send a letter explaining any difference and the next steps.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.