What is a Tax Code on my payslip and How Does It Work?

Tax Codes Explained

In the UK, an employee's tax code is a reference number used by employers to calculate how much income tax should be deducted from their wages or salary. It tells the employer how much of an employee's income is tax-free (through the personal allowance) and how much should be taxed.

Key Elements of a Tax Code:

Personal Allowance:

The amount of income an employee can earn before paying income tax. For most people, this is set at £12,570 (for the tax year 2023/24). This means you don’t pay tax on the first £12,570 of your income.

The Numbers:

A typical tax code looks like 1257L, which reflects a personal allowance of £12,570. The number (1257) is the personal allowance in pounds, and the letter (L) indicates that the person is entitled to the standard personal allowance.

Common Tax Code Examples:

1257L: Standard tax code for most people. It means you have a personal allowance of £12,570.

BR: Used when all income is taxed at the basic rate (20%), often for secondary employment or pensions.

D0: Indicates that all income is taxed at the higher rate (40%).

T: Used when HMRC needs to review the employee's tax situation, or there are special circumstances.

0T: Indicates no personal allowance or allowance is used up, so all income is taxed at the appropriate rate.

When Will Your Tax Code Change?

Changes in income: If your earnings or benefits change.

Benefits in kind: If you receive benefits, like a company car.

Pension contributions: When you start or stop contributing to a pension scheme.

HMRC (Her Majesty's Revenue and Customs) issues the tax codes, and employers are responsible for using them to deduct the correct tax through the Pay As You Earn (PAYE) system. If the tax code is incorrect, it can lead to overpayment or underpayment of tax.