What are PAYE Tax Codes?

By Graham | April 30, 2023

PAYE (Pay As You Earn) tax codes are used by employers and pension providers in the UK to calculate the amount of income tax to be deducted from an employee’s or pensioner’s pay or pension. The tax code is issued by HM Revenue and Customs (HMRC) and is usually composed of numbers and letters. It represents an individual’s tax-free income (also called the personal allowance) for the tax year and helps determine the amount of tax to be withheld from their pay.

The structure of a typical tax code consists of a number derived from the individual’s tax-free personal allowance divided by 10. For example, if someone has a personal allowance of £12,570, the number in the tax code would be 1257. And a letter indicates any special circumstances or adjustments that affect the individual’s tax code.

Table of Contents

The standard PAYE tax code letters are:

L – You are entitled to the standard tax-free personal allowance.
M – For an employee whose spouse or civil partner has transferred 10 per cent of their personal allowance.
N – You have transferred 10% of your personal allowance to your spouse or civil partner.
T – You need to review some items with the employer.
0T – Your personal allowance has been used up, or your new employer does not have the details they need to give you a tax code.
BR – All the income from this job or pension is taxed at the basic rate (usually if you’ve got more than one job or pension).
D0 – All your income from this job or pension is taxed at the higher rate (usually used if you’ve got more than one job or pension).
D1 – All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension)
NT – You’re not paying any tax on this income.

PAYE Tax code letters used in Scotland:

S – Your income or pension is taxed using the rates in Scotland
S0T – For Scotland, this means your personal allowance has been used up, or that your new employer does not have the details they need to give you a tax code
SBR – All your income from this job or pension is taxed at the basic rate in Scotland (usually used if you’ve got more than one job or pension)
SD0 – All your income from this job or pension is taxed at the intermediate rate in Scotland (usually used if you’ve got more than one job or pension)
SD1 – All your income from this job or pension is taxed at the higher rate in Scotland (usually used if you’ve got more than one job or pension)
SD2 – All your income from this job or pension is taxed at the top rate in Scotland (usually used if you’ve got more than one job or pension)

The PAYE tax code letters used in Wales are:

C – Your income or pension is taxed using the rates in Wales
C0T – For Wales, your personal allowance has been used up, or your new employer does not have the details they need to give you a tax code
CBR – All your income from this job or pension is taxed at the basic rate in Wales (usually used if you’ve got more than one job or pension)
CD0 – All your income from this job or pension is taxed at the higher rate in Wales (usually used if you’ve got more than one job or pension)
CD1 – All your income from this job or pension is taxed at the additional rate in Wales (usually used if you’ve got more than one job or pension)

The emergency PAYE tax codes are:

1257L W1
1257L M1

An emergency PAYE tax code is a temporary tax code assigned by HM Revenue and Customs (HMRC) when they do not have enough information about an individual’s income or tax situation to provide a regular tax code. Employers or pension providers use the emergency tax code to calculate the amount of income tax to be withheld from an individual’s pay or pension without a correct tax code.

In the UK, the most common emergency tax code is the “1257L M1” (or “1257L W1” for weekly pay) for the tax year 2021-2022, which assumes the individual is entitled to the standard tax-free personal allowance of £12,570. The “M1” (or “W1” for weekly pay) stands for “Month 1” or “Week 1” basis, which means that the tax calculation is done on a non-cumulative basis. This means that the tax is calculated solely based on the income earned in the current pay period, without considering the income and tax paid in previous pay periods.

While on an emergency tax code, an individual may pay more or less tax than they should. Once HMRC receives the necessary information about the individual’s income and tax situation, it will issue a correct tax code and inform the employer or pension provider.

When an individual overpaid tax while on an emergency tax code, they will typically receive a refund from HMRC through an adjustment in their tax code or as a direct payment. If they have underpaid tax, HMRC will typically collect the underpayment by adjusting the individual’s tax code for the remainder of the tax year.

It’s essential to provide your employer or pension provider with the necessary information, such as a P45 from your previous employer or details about your income, to help HMRC issue the correct tax code as soon as possible.

PAYE Tax Code “X”

An “X” tax code is a specific type of tax code used in the UK by HM Revenue and Customs (HMRC) to indicate that an individual is not subject to any income tax deductions from their pay or pension. This tax code is quite rare and is typically applied in specific circumstances, such as when an individual has reached the State Pension age and has fully utilised their personal tax allowances through other sources of income, like a private pension or investments.

When an individual has an “X” tax code, their employer or pension provider will not withhold any income tax from their payments. However, it is essential to note that having an “X” tax code does not exempt an individual from paying tax altogether. They may still need to pay tax on their income through other means, such as filing a Self Assessment tax return.

If you have been assigned an “X” tax code and are unsure whether it is correct or if you have any concerns about your tax situation, it is advisable to consult a qualified tax professional.

How tax codes change: An overview of situations that may trigger a change in your tax code

Tax codes can change for various reasons, often due to alterations in your personal circumstances, starting a new job, or receiving additional taxable income or benefits. Below is an expanded overview of situations that might lead to a change in your tax code:

Changes in personal circumstances: Your tax code may change if your personal circumstances shift, such as getting married or divorced, becoming widowed, or having a change in your entitlement to tax credits or benefits. These changes can affect your personal allowance and your tax code.
Starting a new job: When you start a new job, your tax code may be adjusted. Your employer usually provides a P45 from your previous job containing your tax code information. If you don’t have a P45, your employer may use a starter checklist to gather the necessary details, or you could be placed on an emergency tax code temporarily until HMRC provides the correct tax code.
Receiving additional taxable income: If you start receiving income from additional sources, such as rental income, investments, or a second job, your tax code may change to account for the extra income and ensure you are paying the correct amount of tax.
Changes in benefits: Your tax code may be adjusted if you start receiving or stop receiving taxable benefits from your employer, such as a company car or private medical insurance. These benefits are considered part of your income and can affect your tax-free personal allowance.
Changes in your tax-free personal allowance: Your personal allowance may change due to inflation adjustments or changes in tax legislation. This can result in a change in your tax code to reflect the updated allowance.
Overpayment or underpayment of tax: If you have overpaid or underpaid tax in a previous tax year, HMRC may adjust your tax code to collect the underpayment or provide a refund for the overpayment. This can also occur if there are errors in your tax code or if your circumstances change during the tax year.
Reaching State Pension age: When you reach State Pension age, you no longer pay National Insurance contributions. This change may affect your tax code, particularly if you continue to work while receiving your State Pension or have other income sources.

It is essential to keep your personal information up to date with HMRC and inform them of any changes in your circumstances that might affect your tax code. Regularly reviewing your tax code and ensuring its accuracy can help you avoid paying too much or too little tax.

How to update your tax code

If you need to update your tax code, follow these steps:

Inform HMRC: Notify HM Revenue and Customs (HMRC) of any changes in your personal circumstances that could affect your tax code, such as changes in your marital status, new employment, or additional income sources.
Provide necessary documentation: Provide HMRC with any relevant documents or information they may require, such as a P45 from your previous employer, details about your new job, or information about additional income sources.
Wait for an updated tax code: HMRC will review the information provided and, if necessary, issue a new tax code. This process can take some time, so updating your information as soon as possible is essential.
Please communicate with your employer: Inform them about the change in your tax code. However, they cannot update their payroll records until they receive an employer notification direct from HMRC.

Tax codes for multiple jobs or income sources

When you have multiple jobs or income sources, your tax code may be adjusted to ensure you pay the correct amount of tax. Typically, your personal allowance will be allocated to your primary job (the one with the highest income), and you’ll be given a tax code that reflects this. Your secondary job(s) will usually be taxed at the basic rate, which is represented by the BR tax code. If you have a higher or additional rate taxpayer, you might have a D0 or D1 tax code for your secondary job(s).

Tax codes and self-employment

Self-employed individuals do have tax deducted using a PAYE tax code like employed individuals. Instead, they are required to report their income and pay taxes through the Self Assessment system. Self-employed individuals must register for Self Assessment, complete an annual tax return, and pay any taxes owed by the specified deadlines.

Tax codes for expatriates and non-residents

Expatriates and non-residents may have different tax codes based on their residency status and the source of their income. For example, non-residents with UK-sourced income may receive a tax code with the NT (No Tax) or other appropriate tax codes, depending on their situation. You must inform HMRC of your residency status and any changes to ensure you have the correct tax code.

Common tax code errors and how to resolve them

Some common tax code errors include being on an emergency tax code, incorrect allocation of personal allowances, or errors in calculating taxable benefits. To resolve tax code errors, contact HMRC and provide them with the necessary information to correct your tax code. You may need to provide supporting documentation or information about your income, benefits, or personal circumstances.

Frequently Asked Questions (FAQs) about tax codes.

A compilation of common questions and answers related to UK tax codes, covering a wide range of topics and scenarios.

How do I find my tax code? Your tax code can usually be found on your payslip, P45 or P60 form, or any letters you receive from HMRC about your tax.
What should I do if my tax code is wrong? If you believe your tax code is incorrect, contact HMRC with the necessary information and documents to support your claim. They will review your case and issue a new tax code if needed.
How do I inform HMRC of a change in my personal circumstances? You can inform HMRC of changes in your personal circumstances by calling their helpline, sending a letter, or updating your personal tax account online.
What is the standard tax code for the 2023/2024 tax year? The standard tax code for the 2023/2024 tax year is 1257L, which represents a tax-free personal allowance of £12,570.
Can I split my personal allowance between multiple jobs? Your personal allowance is typically allocated to your primary job (the one with the highest income). Your secondary job(s) will usually be taxed at the basic rate, using tax codes such as BR, D0, or D1.
How does my tax code affect my pension? Your pension provider uses your tax code to calculate the amount of income tax to be deducted from your pension payments. An incorrect tax code may result in overpayment or underpayment of tax on your pension income.
What is the emergency tax code? The emergency tax code is a temporary tax code assigned when HMRC does not have enough information about your income or tax situation to provide a regular tax code. The most common emergency tax code for the 2023/2024 tax year is 1257L M1 (or 1257L W1 for weekly pay).
How does the Marriage Allowance affect my tax code? The Marriage Allowance allows you to transfer 10% of your tax-free personal allowance to your spouse or civil partner, provided they earn less than you and are a basic rate taxpayer. If you receive the Marriage Allowance, your tax code will include an ‘M,’ and if you transfer your allowance, your tax code will include an ‘N.’
What is an NT tax code? An NT tax code indicates no tax will be deducted from your income. This tax code is used in specific circumstances, such as for non-residents with UK-sourced income that is not subject to tax or for individuals who have provided HMRC with a valid Double Taxation Treaty relief claim.
How can I claim a tax refund if I have overpaid tax? If you have overpaid tax due to an incorrect tax code, HMRC will usually correct your tax code and issue a refund either through an adjustment in your tax code or as a direct payment. If you believe you are owed a tax refund, consult your Accountant.

Helpful Accountants for PAYE Tax Codes

Understanding your PAYE tax code is crucial to ensure you pay the correct income tax amount. Make sure to review your tax code regularly and get in touch with your Accountant if you have any concerns or believe it might be incorrect. By staying informed and proactive about your tax situation, you can avoid potential issues and have peace of mind that you are fulfilling your tax obligations.

If you need further assistance or clarification on PAYE tax codes, don’t hesitate to contact our qualified tax professionals. Stay informed and up-to-date on your tax affairs is key to a smooth financial life.