Tax codes are basically the combination of letters and numbers denoting how much tax will an individual pay. So without delay, lets dive in.
Tax codes will tell you how much income will be tax free, depending on annual income, company benefits and state pension a person receive in a year. The first part of the tax code will include numbers, and the last one will have one letter. The figures provided inform the employer or pension provider of the maximum earnings an employee can receive before they are required to pay tax. HMRC calculates this amount based on the individual’s personal allowance and any additional untaxed income they may have.
The letter in a standard tax code shows how an individual’s personal circumstances influence their yearly personal allowance.
HM Revenue & Customs (HMRC) issues tax codes, but it’s essential to review them periodically, particularly if an employee’s situation changes. Tax code can be found on: From your Payslip or P45. Tax code notice letter from HMRC – HMRC App Tax code for current year online To illustrate, A individual is entitled to standard deduction of £12570 but company has also provided him a vehicle. As it is the benefit you get from the company, it will reduce the amount of Personal Allowance and tax code will be changed.
Following is the list of Tax codes along with their explanation:
- 1257L : This is the tax code indicating a tax free personal allowance of £12570.
- OT: It’s often used for new employees who don’t have a P45. It is used when your personal allowance has been used up, and no further allowance is to be given.
- D0: This code is for when all income is taxed at the higher rate (usually used for a second job or pension).
- BR: All income from this job or pension is taxed at the basic rate, which is commonly applied if you have a second job or pension.
- D1: When on the D1 tax code, all income is taxed at the additional rate, applicable in certain high-earning scenarios.
- NT: NT denotes No Tax from your income.
- C0 [C1 or C2]: This is used for company directors to distribute their tax-free personal allowance evenly throughout the year.
- S0T, SD0, SD1, SD2: These tax codes are prefixed with ‘S’ for Scottish taxpayers, and the numbers follow the same rules as 0T, D0, D1, and similar codes.
- K: This indicates that you have income not being taxed elsewhere, and it exceeds your tax-free allowance.
- M: [Marriage Allowance] This means you are benefiting from 10% of your partner’s personal allowance.
- N: [Marriage Allowance] Shows that you’ve allocated 10% of your personal allowance to your partner.
- T: This is usually applied when additional calculations are necessary to determine your Personal Allowance, often requiring a review by HMRC.
- C: Income or pension is taxed using the rates in Wales.
Emergency Tax Codes: As of 6 April 2024, the following emergency tax codes will apply:
M1 – Paid monthly W1 – Paid weekly X – Non – standard OT – Insufficient Information Tax codes might feel complicated at first, but with some basic knowledge, you can handle the PAYE system with ease. Just remember to check your tax code regularly, as it affects your take home pay.
