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Understanding your tax code
Understanding your tax code
Rebecca Russell avatar
Written by Rebecca Russell
Updated over a week ago

What is a tax code?

A tax code tells your employer how to treat your earnings for tax purposes. Your tax code is based on your individual circumstances. Your tax code will tell you:

  • If you're paying Scottish, Welsh or Rest of UK tax.

  • How much personal allowance you have.

  • If your tax code is temporary or standard.

  • If you've given personal allowance to or received personal allowance from your spouse.

  • If your tax is calculated cumulatively or on a period by period basis

HMRC will never disclose the details of how your tax code has been calculated to your employer. Your employer will only be told your new tax code and when to apply it.

Personal Allowance

The numbers in your tax code tells your employer how much personal allowance you have.

A tax code 1257L means that you have £12,570 of personal allowance to use in the tax year.

This allowance is distributed evenly over your pay periods so if you're paid monthly you'll receive £1,047.50 each month tax-free.

Any unused allowance is carried forward if you're on a cumulative tax code. You're on a cumulative tax code if it does not end in W1 or M1.

Scottish, Welsh or Rest of UK tax payer

The letter at the beginning of your tax code decides which rates of tax and which thresholds to use:

  • If your tax code has an S prefix, you'll pay tax using the Scottish rates and thresholds.

  • If your tax code has a C prefix, you'll pay tax using the Welsh rates and thresholds.

  • If your tax code has no prefix, you'll pay tax using the Rest of UK (rUK) rates and thresholds.

For further information about rates of tax and thresholds for the 2023/2024 tax year, please refer to HMRC's guidance.

L, M, N and T Codes

The letter at the end of your tax code gives further information about your circumstances:

  • If your tax code has an L suffix, it's your standard tax code for the year.

  • If your tax code has an M suffix, you've received personal allowance from your spouse.

  • If your tax code has an N suffix, you've given some of your personal allowance to your spouse.

  • If your tax code ends in T, this is a temporary code while HMRC decide the correct tax code to use.

K Codes

If your tax code has a K prefix, this means you owe tax to the HMRC. Rather than receiving personal allowance to reduce your taxable pay, your taxable pay is increased instead.

Example

A tax code of K100 means you'll pay tax on an additional £1,000 in the tax year.

Each month your taxable pay is increased by one twelfth of the £1,000 from your tax code, £83.33.

If your base pay is £3,000, then your taxable pay is £3,083.33.

Other tax codes

There are other tax codes that include no personal allowance, and confirm the exact rate of tax to be deducted:

Tip: These might also be prefixed by S (Scottish) or C (Welsh) to apply different tax rates and thresholds.

  • 0T - You have no personal allowance.

  • BR - You're taxed at the basic rate.

  • D0 - You're taxed at the higher rate

  • D1 - You're taxed at the additional rate

For further information about the tax rates, please refer to HMRC's guidance.

Non-cumulative codes

If your tax code ends in an M1 or a W1, your tax is calculated on earnings you receive in that period. It ignores your previous taxable pay or tax paid. Each period, you'll receive just one period's worth of personal allowance.

For example, if you're paid on a monthly basis and your tax code is 1257L, you'll receive a personal allowance of £1,047.50.

This is also known as a non-cumulative tax code or a week 1/month 1 basis.

For further information about the difference between a cumulative and non-cumulative tax code, please refer to our Help Centre article.

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