The Spicer & Co. tax experts are often asked to explain tax codes … what they mean, how they affect tax payments and why they change. ‘A seemingly random combination of letters and numbers dictates how much tax should be paid out of your wages, salary or pension,’ explains Suzanne Spicer of Spicer & Co Chartered Accountants in Dunstable. ‘If the code is wrong, you could be paying too much tax or end up with an extra tax bill to cover insufficient payments.’
Where does my tax code come from?
HMRC assigns your tax code. This code tells your employer or pension provider the correct amount of tax to be collected. Every tax code involves numbers and letters.
What does it mean for my tax payments?
The numbers refer to how much money you can earn tax-free. This will vary between different income streams – such as if you have more than one job – and may therefore change to reflect your new earning circumstances. Multiply the number by 10 to know the total amount of income you can earn before tax. For example, the personal allowance for 2024 – 25 is £12,570. The numeric code referring to this amount is 1257.
The letter within your tax code represents your personal tax situation (see examples below). The letter ‘L’ denotes you receive the basic Personal Allowance. Usually, it reflects having one job, no unpaid tax, untaxed income or taxable benefits. For many people, this means their tax code this year (2024 – 25) is 1257L.
Therefore, the numbers reflect how much you can earn from your income stream before paying tax. The letters reflect your tax situation.
What does the letter in my tax code represent?
The most common letters are:
L – entitles to standard tax-free Personal Allowance (see above)
M – you’ve received a transfer of 10% of your partner’s Personal Allowance
N – you’ve transferred 10% of your Personal Allowance to your partner
T – your tax code includes other calculations to work out your Personal Allowance
0T – your Personal Allowance has been used up, or your new employer has insufficient details to allocate a tax code
BR – all your income from this source is to be taxed at the basic rate
D0 – all your income from this source is to be taxed at the higher rate
D1 – all your income from this source is to be taxed at the additional rate
NT – you are not paying tax on this income
(Source: gov.uk)
You’ll notice your tax code on your payslip, the P60 you receive at the end of the tax year and the P45 you receive if you change jobs.
Further questions?
Employers must deduct the right amount of tax from their employees and pay HMRC correctly and on time. Our expert payroll team can remove the pain of payroll processing and compliance, including the requirements of the construction industry scheme.
Contact us for an initial discussion without obligation. We are here to ensure your tax deductions are correct.