Understanding Tax Codes

6 minute read | 10 January 2022

A tax code is a combination of letters and numbers given to show HMRC how much tax you should be paying.

The amount of tax you pay is dependent on different factors which include how much income you have and how much tax you’ve already paid that year. The number that shows on your code is the amount you can earn before any tax is due divided by 10. The letter is how much tax you need to pay monthly, which is a bit more complex to understand. Different people will have different tax codes depending on their circumstances.

You can use this simple Tax Calculator to work out your tax code.

  • Ends with L: This is the most used tax code as it is used for people who have one job or pension.
  • Starts with K: This represents a payment tax owed from a previous year over your personal allowance. The value you get taxed on will not be more than half of the value you’ve earned. You may also have this tax code if you have work benefits you need to pay tax on.
  • Ends with BR or the letter D followed by a number: These mean you have more than one source of income (such as pension, second job or investments). If your main income source is over your personal allowance (usually £12,570), your second income will all be subject to tax. BR means all of your second income is taxed at the basic rate (20%), whilst D relates to a higher rate (40%).
  • End with M or N: People who are married or in a civil partnership can transfer 10% of their personal allowance to their partner and these codes represent exactly that, people that have Marriage Allowance. The person receiving the allowance will have an M instead of the L, while the other person will have an N
  • Ends with W1 or M1 at the end: This means you’re on an emergency tax code which we will explain below.
Emergency tax codes
 

An emergency tax code is a temporary tax statue until the HMRC works out which tax code to apply. Here’s a couple of reasons why you may be placed an emergency tax:

  • You’ve started a new job and haven’t got your P45 from your old employer
  • You’re starting your very first job
  • You’ve become an employee after being self-employed
  • You get company benefits (like a van or car)
  • You receive the state pension
In most cases, people placed on emergency tax have the following tax codes:
  • 1257 W1
  • 1257 M1
  • 1257 X

If you think you haven’t paid as much tax as you needed to, let the HMRC services know as they may need to change your tax code. On the other hand, if you think you have paid too much tax, check if you’re due a refund on the HMRC website.

If you have any questions on you tax code, please contact the HMRC services. (https://www.gov.uk/browse/tax)

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