Saving Tax: Understanding Your Tax Code

With the cost of living set to sky rocket over the next few months, here at PaperRocket, we are going to be dedicating a few of our weekly blogs to looking at ways to ensure that you are not missing out on any allowances that you may be entitled to, that could save you money in these testing times.

This week we will be looking at tax codes. Having an incorrect tax code applied to your salary can potentially leave you out of pocket, or perhaps even worse, with an additional amount of tax to pay in the future.

Who has a tax code and what are they for?

Anyone who is in full or part time employment, or receiving a private pension will have a tax code. Those who are self employed, unemployed or receiving the state pension will not have a tax code.

Your tax code will tell your employer the amount of tax that they need to deduct from your wages/pension before the net amount is paid to you. They will then pay this over to HMRC on your behalf. The tax code indicates to employers what amount of ‘personal allowance’ you are entitled to- that is, how much of your salary is tax free. It is worth noting that if you have more than one job, then you will have different tax codes for each employment.

Where can I find my tax code?

Your tax code should be on anything PAYE related from your employer, so payslips, P45, P60s etc. Just before the start of each tax year, HMRC should write to you to let you know your tax code for the upcoming year.

If HMRC have reason to change the tax code partway through the year, they will write to you with your new code, as well as a breakdown of how it has been made up.

What your tax code means

If you check your tax code, you will notice that it is usually made up of a combination of letters and numbers. The standard tax code for 21/22 (and indeed, until 2026 as the personal allowance has been frozen until then) is 1257L.

The numbers reflect what your tax free allowance is. You take the numbers, and then add a zero onto the end, and that is the amount that you can earn before you start having to pay tax. So, with the standard 1257L tax code, this means you are entitled to £12,570 tax free income for the year. The number may be higher or lower than 1257 if you have any employment benefits or expenses. So, if, for example, you have a company car, your personal allowance will be reduced, and the number will be lower than 1257. Equally, if you have employment expenses that you pay for personally, for example, professional memberships, this number will be higher.

The letters are a bit more complicated as there are a number of different letters that can be used, meaning various different things- the full list can be found on the HMRC website here. The most common ones are:

  • L– the standard tax free personal allowance
  • M or N– these relate to claiming the marriage allowance (discussed in last week’s blog here). The letter will be M if you are the recipient of 10% of your partner’s personal allowance, and N if you are the one transferring your allowance to your partner.
  • T– your tax code includes other calculations to your personal allowance. If this is the case, these will be broken down in your coding notice.
  • BR– this is common if you have more than one job, and your personal allowance is being used up in the other employment. It stands for Basic Rate, and means that all of your income from that job will be taxed at the basic rate.
  • W1/M1/X– these indicate an emergency tax code, that will be updated once HMRC have all of the details required to issue your correct tax code.
  • K– a K at the start of your tax code is issued when you have other untaxed income, or underpaid tax from previous years, and it is worth more than your personal allowance. In this instance, your employer will deduct the tax that would be due on your untaxed income, from their employment income.
What if I think my tax code is wrong?

If you have a government gateway account, and you know what changes need to be made (for example, you want to include employment expenses or benefits), you can login and request the change online.

If, however, you are unsure, or the situation is a bit more complicated, it is probably worth speaking to a real life human (rare, I know, in this day and age) by calling HMRC on 0300 200 3300, and they will be able to advise and get your code updated if necessary.

PaperRocket Accounting provide accounting and tax services to professional contractors, freelancers, and small businesses working in the UK.

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