Tax codes may not be the first thing you look at on your payslip each month, but the short combinations of letters and numbers are key to your finances.
Worryingly, a poll of 3,215 adults by the wealth manager Killik & Co in 2024 found almost a third (32%) of people had never checked their tax code. It means they could be paying more to the taxman than they should be.
Found on important documents, such as your payslip or pension statement, tax codes are vital because they tell you exactly how much you’re paying the government.
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Occasionally, they can be wrong, which could leave you with either a big rebate or a hefty tax bill from HMRC.
That in and of itself is a good excuse to make sure that your tax code is correct. With the new tax year well underway, now could be a good time to make sure that you won’t be caught out by an error.
Sarah Coles, head of personal finance at Hargreaves Lansdown, says that making sure your tax code is correct at the start of the new year helps you avoid any problems that may arise down the line “because your income tax will be deducted using your new PAYE code for the year”.
Coles says that while if HMRC has made a mistake this will eventually be corrected by altering your code, this could come too late.
“By then you might have significantly under- or over-paid, which could end up causing horrible cash flow problems. So it’s well worth checking it yourself to be sure,” she adds.
Furthermore, if you own a business “it may also be beneficial to check your balance of salary and dividends to help make the most of your personal allowance and lower tax rate on dividends,” according to Rachael Griffin, tax and financial planning expert at Quilter.
With tax codes affecting the amount you get each payday, we look at what they are, and what they mean for you.
What are tax codes?
Your tax code is basically a note from HMRC to you and your employer or pension provider that explains how much tax you’re due to pay on a monthly basis between April and March (i.e. over each tax year).
It always comes with a letter that describes your employment status and may have numbers, which usually reflect your tax-free allowance and any reliefs you're eligible for, but can also refer to your tax band.
For example, if you have one job or one pension, you’re likely to see ‘1257L’ on your payslip. This refers to the £12,570 tax-free allowance you get on your income tax. This standard personal allowance has been frozen until April 2028.
However, when the nature of your employment changes, extra complications may be brought into the system which can result in your tax code being incorrect.
Coles says: “Things can go awry if you have changed jobs, if you have more than one job, or have recently retired, so while everyone should check their code, if you fall into any of these brackets, it’s particularly key.”
If you're self-employed, you will not have a tax code. Instead, you will have to file a self-assessment tax return each year.
Full list of tax code letters and what they mean
Your employment or tax status may be a little more complicated. So, here is a full list of the letters you’ll normally see - and what they tell you about your tax status.
Tax code letters in England and Northern Ireland
- BR - It means all of the income from this job or pension is taxed at the basic rate. It’s usually used if you’ve got a second job or a pension.
- D0 - All of your income from this job or pension is taxed at the higher rate. Again, this is most likely to appear on the payslips of those with a second job.
- D1 - All of your income from this job or pension is taxed at the additional rate (if you’ve got a second job or pension pot).
- L - This means you are getting the standard income tax-free personal allowance (£12,570).
- M - This letter shows you’ve received a transfer of 10% of your partner’s personal allowance, as part of the marriage allowance tax break.
- N - This letter means some of your personal allowance has been passed over to your partner as part of the marriage allowance.
- NT - This letter shows you are not paying any income tax on the money you’re getting (for example, if all of your income comes via capital gains).
- T - This letter shows that other calculations are included in working out your personal allowance.
- 0T - This code means your personal allowance has been used up, or that your new employer doesn’t have all of the details they need to give you a proper tax code.
Sometimes, you may see a different letter on your payslip. This is most likely to be an emergency tax code. These are temporary and usually only appear when you’ve: started a new job, become an employee after having been self-employed, started receiving company benefits or a state pension. The codes to look out for are: W1, M1 or X. They will normally follow the standard 1257L code.
Another possibility is that you’ll get a code beginning with ‘K’. You’ll see this if you’ve got an income that’s being taxed in a different way and exceeds your income tax-free personal allowance. For example, you may be paying tax you owe from a previous financial year, or receiving taxable benefits from your company or the state.
Your tax code could change if you receive a bonus or another form of one-off payment from your job. Given HMRC assumes any monthly increases signify a permanent pay rise, it may put you in a higher tax band (assuming the one-off rise would push you above a particular threshold if it continued for the rest of the tax year).
This is a particularly big issue if the bonus makes it look like you'll be earning more than £100,000 a year, as your tax-free allowance will start to taper off. To avoid this outcome, it's worth keeping an eye on your payslips. If you spot anything that's incorrect, get in touch with HMRC immediately.
It's also an issue for thousands of pensioners who withdraw a large one-off amount from their pension pot and HMRC then assumes they will take that sum out of their pension every month. Pensioners have reclaimed £1.37 billion since 2015, after they were overtaxed on pension withdrawals. More than 14,600 repayment claims were processed, amounting to almost £50 million, in the last three months of 2024.
Tax code letters in Scotland
Income tax can be set differently by the devolved UK nations. As such, they have different codes to those you get in England. Here’s what the Scottish and Welsh codes look like.
- S - This letter shows your income or pension is being taxed using Scottish rates.
- SBR - This code means all of your income from this job or pension is being taxed at the Scottish basic rate (20%).
- SD0 - This code tells you that all of your income from this job or pension is being taxed at the intermediate rate in Scotland (21%).
- SD1 - This code means all of your income from this job or pension is taxed at Scotland’s higher rate (42%).
- SD2 - This shows that all of your income from this job or pension is being taxed at the advanced income tax rate in Scotland (45%).
- SD3 - This shows that all of your income from this job or pension is being taxed at the top rate in Scotland (48%).
- S0T - This code means your personal allowance (£12,570) has been used up, or that your employer doesn’t have all of the details they need to provide you with a tax code.
Tax code letters in Wales
- C - This letter means your income or pension is being taxed using the rates in Wales (which are the same as they are in England).
- CBR - This code shows all of your income from this job or pension is getting taxed at the Welsh basic rate (20%).
- CD0 - This shows you that all of your income from this job or pension is being taxed at the higher rate for Wales (40%).
- CD1 - This code means that all of your income from this job or pension is taxed at the additional rate in Wales (45%).
- C0T - If you see this, it means your personal allowance has been used up, or your employer doesn’t have all of the details they need to provide you with a Welsh tax code.
What to do if you think your tax code is wrong
If you think your tax code is incorrect, you can contact HMRC either online or by phone.
The Check your Income Tax online service lets you update your employment details and users can tell HMRC about a change in income which could have affected your tax code.
HMRC may then change your tax code following these updates.
To contact HMRC via phone, call: 0300 200 3300 or, if you’re outside the UK, dial: +44 135 535 9022
You can also write to HMRC. Post your letter to: Pay As You Earn and Self Assessment
HM Revenue and Customs
BX9 1AS
United Kingdom
If you need to tell HMRC about a change in someone else’s income on their behalf (eg you’re their accountant), you should fill in a PAYE Coding Notice query form.
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