What is a tax code?

A tax code is used by HMRC to tell an employer how much Income Tax to deduct from an employee’s pay.

The tax code is applied through payroll and directly affects how much tax someone pays each payday.

HMRC issues tax codes. Employers and payroll providers must use the most recent code provided by HMRC.

What does a tax code look like?

A common tax code looks like this:

1257L

It is usually made up of numbers and a letter.

The numbers

The numbers show how much tax free income someone can receive in a tax year.

For example:

1257L means the employee can earn £12,570 tax free in that tax year.

The payroll system spreads this tax free amount across the year, so part of it is used each pay period.

The letter

The letter gives HMRC more information about the employee’s situation.

For example:

• L is the standard tax code for most people with one job

• M or N can relate to the Marriage Allowance

• T means other calculations are involved

• K means the employee has additional taxable income and pays more tax

There are also special codes such as:

• BR, where all income is taxed at the basic rate

• D0, where all income is taxed at the higher rate

• D1, where all income is taxed at the additional rate

• 0T, where no tax free allowance is applied

How does someone get their tax code?

HMRC decides an employee’s tax code based on information it holds, such as:

• Whether they have more than one job

• Whether they receive benefits or untaxed income

• Whether they owe tax from a previous year

When someone starts a new job, their tax code may be based on:

• A P45 from their previous employer

• A starter checklist completed when they join

HMRC may later send an updated tax code directly to the employer.

Why tax codes change

A tax code can change during the year if:

• Someone starts or stops receiving benefits

• They start a second job

• HMRC adjusts their personal allowance

• There was underpaid or overpaid tax in a previous year

When HMRC issues a new tax code, payroll must apply it.

What if a tax code seems wrong?

Employers and payroll providers cannot choose or change a tax code themselves unless instructed by HMRC.

If an employee believes their tax code is incorrect, they must contact HMRC directly to review it.

Once HMRC updates the code, it will be sent through to payroll and applied.

Why tax codes matter

Using the correct tax code helps ensure:

• The right amount of tax is deducted

• Employees do not build up unexpected tax bills

• Overpayments are minimised

Understanding tax codes helps employees see why their take home pay may change, even if their salary has not.