Everyone that is employed in the UK has a tax code. It’s a letter and a number that is used by your employer to work out how much tax they need to deduct from your wages.
Each tax code is made up of a letter and a number that tells the employer various information about how much tax you’re entitled to pay.
Read on for further insight on how to understand your tax code and what it means for your take home pay.
What Is A Tax Code?
A tax code is created and issued by HM Revenue and Customs (HMRC) and the specific code that you are issued is based on the guidelines set by HMRC.
As the code is used to inform the employer and pension provider about how much income tax they should deduct from the person’s salary or pension check, it’s important that it is correct.
A tax code is a combination of numbers and letters with each section telling the employer something about you. For example, a tax code 1257L shows that you have offered the standard tax free personal allowance of about £12,570 per year.
A tax code is a standardised way to make sure that a person is being taxed at the right level for their individual circumstances.
What Do The Numbers And Letters In My Tax Code Mean?
Confused by all the different letters and numbers that can make up a tax code? You’re not the only one!
In simple terms, the numbers indicate how much personal allowance you have. That’s the amount that you can earn before paying any tax. The letter indicates if there are any other circumstances personal to you that need to be considered.
For example, if your tax code is 1257L, your tax free personal allowance is £12,570 and if you have the letter ‘K’ at the end of a tax code means that you have some untaxed income or pension.
The letter ‘L’ is the most common tax code and it means that you are entitled to the standard personal allowance.
The table below gives a breakdown of the most common tax codes and their meanings:
| Tax Code | Meaning |
| Letter L | Common tax code that shows that you are entitled to the standard tax free personal allowance. |
| Letter M | M is a code for marriage allowance. It shows that you have taken 10% of your partner’s personal tax free allowance. In this case your tax free allowance will be 10% higher than the standard amount. |
| Letter N | N is also a code for marriage allowance. It shows that you have given 10% of your own personal tax free allowance to your partner. In this case your tax free allowance will be 10% lower than the standard amount. |
| Letter T | This letter in code shows that some other methods have been used to calculate your taxes. |
| OT Code | This code shows that all of your tax free allowance has been used. It might be added if you have started a new job and haven’t submitted a P45 to your new employer. |
| BRAII | If you have two or more jobs this code is used to show that one of your incomes is taxed at a basic rate. |
| D1AII | For a person who is taxed on an additional rate at a job this code is used. |
| NT | A person has this code on their payslip if they are not taxed on their income. |
Tax Codes at Scottish Rates
| Tax Code | Meaning |
| S Letter | It represents that the income is taxed at Scottish rates. |
| SOT | This code shows that all your tax free personal allowance is used up. In case you have started a new job and haven’t submitted the P45 to your employer, then this code is used. |
| SBRAII | This Scottish code is used if you are working on 2 jobs and one of the jobs is being taxed at a basic rate. |
| SDOII | This Scottish code represents that all your income is being taxed at an intermediate rate based on Scottish rules. For a person who has more than 1 job, this code is often used. |
| SD1AII | If a person has more than 1 job, this code shows that their income is being taxed at Scottish Higher Rate. |
| SD2AII | If a person has more than 1 job, this code shows that their income is being taxed at Scottish Top Rate. |
Welsh Tax Codes
| Tax Code | Meaning |
| C | Income is taxed at Welsh Rates. |
| COT | This code shows that all your tax free personal allowance is used up. If you have started a new job and haven’t submitted the P45 to your employer, then this code is used. |
| CBRAII | This Welsh code is used if you are working on 2 jobs and one of the jobs is being taxed at a basic rate. |
| CDOAII | If a person has more than 1 job, this code shows that their income is being taxed at Welsh Higher Rate. |
| CD1AII | If a person has more than 1 job, this code shows that their income is being taxed at Welsh Additional Rate. |
Do I Have The Right Tax Code?
It’s compulsory for employers to deduct the right amount of tax from employee earnings when they are paid through the pay as you earn ‘PAYE’ method. If there is any disparity in the tax code or tax deduction you should contact HM Revenue and Customs (HMRC).
For those who are self employed, you will need to check your tax code yourself. You are able to verify your tax code when completing your annual Self Assessment Tax return.
You can also check your tax code here using the Government’s helpful online tool: https://www.gov.uk/check-income-tax-current-year
What Happens If I Use The Wrong Tax Code?
If the wrong tax code gets used when calculating your pay and tax amounts, you will end up either paying too much tax or too little tax. Both situations will be rectified by HMRC.
If you have overpaid, you will be sent a rebate for the overpayment amount and if you have paid too little tax, you will be contacted and asked to make a payment to cover the shortfall.
You can avoid both these situations if you carefully check your tax code and taxes and flag any discrepancies with HMRC as soon as possible.
What If My Circumstances Change?
There is a high chance that your circumstances might change during the tax year. For example you might move house, get a payrise, take on a second job, or decide to change employment status to that of self employed.
In any of these cases, you should make sure that HMRC is informed so that they have the up-to-date information about your employment and contact details on record.
When you make them aware of these changes, they will reissue your tax code promptly if the change requires an update to your tax code.
You may end up paying too much or too little tax in the crossover period before any changes have been documented in HMRCs system. If this happens, the over or under payment will be managed in the way we outlined above.
How Much Tax Do I Pay On 1257L?
If your tax code is 1257L – this means that you have the standard personal tax free allowance available and it is the most common tax code in the UK.
In simple terms it means that you will not pay any tax on the first £12,570 that you have earned.
After that you will pay income tax at the standard UK rate outlined below.
| Type of Tax | Tax Percentage | Earnings |
| Personal Allowance | 0% | Up to £12,570 |
| Higher Tax Rate | 40% | £50,271 to £150,000 |
| Basic Tax Rate | 20% | £ 12,571 to £50,270 |
| Additional Tax Rate | 45% | £150,001 and above |
The table above outlines standard amounts to be aware of but your individual case may be different depending on whether you are eligible for tax relief or benefits. If this applies to you, using the online tax calculator tool at HMRCs website is the easiest way to understand how much tax you are required to pay.
How Is Income Tax Calculated?
Income tax is calculated based on your taxable income. This is your total income from all sources, minus any allowances or reliefs that you’re entitled to.
Your taxable income is then taxed at the relevant tax rate, depending on how much you earn. The personal allowance is the amount of money you can earn before you start paying income tax.
Income tax is deducted from your wages by your employer before you receive your salary, or it’s paid directly to HMRC if you’re self-employed.
The amount of income tax you pay will depend on how much you earn and what tax bracket you’re in.
Income tax is calculated based on your taxable income and which tax bracket that you’re in.
Taxable income is the total amount of money that you earn from all sources excluding any allowances or reliefs.
The amount left over is your taxable income and this is the figure that a percentage of tax (based on the table above) will be charged.
If you are employed, the tax will be deducted by your employer but if you are self-employed, you will be responsible for paying the tax that you owe. This is done via a self assessment tax return once a year, so it’s important that you set aside enough money to pay the bill.
Here are some examples of how income tax is calculated.
Example 1: Income – £10,000
Person A has a total income of £10,000 and they have a tax code of 1257L. In this example the income falls under the category of tax free personal allowance meaning that there is no income tax to pay and they would keep 100% of their earnings.
Example 2: Income – £42,000
Person B has income of £42,000 and a tax code of 1257L. This means that they have a personal allowance of £12,570, so that amount of the £42,000 will be tax free. The remaining £29,430 will be taxed at the 20% basic rate.
20% of £29,430= £5,886 tax due.
Example 3: Income – £74,000
Person C has an income of £74,000 and a tax code of 1257L. Once the £12,570 personal allowance has been accounted for, the next £37,900 will be taxed at the basic tax rate of 20%. Then the remaining £23,530 falls into the higher tax bracket and will be charged income tax of 40%.
- 0% on the first £12,570 = £0
- 20% on the next £37,900 = £7,580
- 40% on the remaining £23,530 = £9,812
Final Thoughts
It’s natural to feel a bit confused by tax codes but hopefully you should now have a better understanding of what the individual letters and numbers mean.
Most people in the UK will have the tax code 1257L but not everyone. The most important thing to be aware of is that the amount you earn and the benefits or tax relief that you’re eligible for will all impact the amount of tax that you are required to pay – and therefore your tax code.
Remember to keep HMRC up-to-date with any changes to your employment or contact details so that they can issue a new tax code.
If you are unsure about your taxes or are having trouble resolving a specific query, it’s always best to speak to a qualified tax advisor or an accountant. They will be able to help you or talk to HMRC on your behalf.
