How to understand your tax code

We delve into what each tax code represents on your payslip, so you can work out what your deductions on your pay slip mean, and what to do if you think you’re on the wrong code

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There are various numbers and letters on your payslip which can be tricky to decipher if you’re trying to work out whether you’re being paid correctly or paying the right amount of tax. We take a look at what each means and what you can do if you think you’re on the wrong tax code.

What is a tax code?

A tax code is a sequence of letters and numbers that help you determine how much tax you should be paying. Tax codes are regulated by HMRC and they can differ based on your circumstances – the system works by taking the amount of tax you owe off your salary before you receive it.

How are tax codes worked out?

Tax codes are worked out by HMRC, who then send this information to your employer or pension provider so that you’re taxed the right amount, here’s how:

  1. Your tax-free personal allowance is determined
  2. Any other income you haven’t already paid tax on is combined with the value of added benefits you receive from your job (for example a company car)
  3. This total is then taken off your personal allowance, and the remaining amount is your tax-free income for that tax year
  4. Tax codes are always shown with the last digit of the tax-free amount removed – for example, the most common tax code for 2019/20 is 1250L

Who has a tax code?

You have a tax code if you are a full or part-time employee or you’re receiving a private pension

You don’t have a tax code if you’re self-employed, unemployed or you only receive a state pension.

What are the different tax codes and what do they mean?

There are many different tax codes which vary depending on factors such as your location and earnings. It’s important to make sure that the letter is relevant to your situation.

  • BR: This stands for basic rate, and it’s when you’ve used up your personal allowance of £12,500 and then charged 20% of your income up to £37,500. This is usually if you have more than one job or pension
  • C: This is based on your taxable income or pension if you’re a Welsh taxpayer
  • C0T: This code refers to the rates in Wales, and it means either you’ve used up your personal allowance, you’ve not got a P45 or your employer doesn’t have enough information to provide you with a tax code
  • CBR: If you’ve already used up your personal allowance, your income from this job or pension is taxed using the basic rate in Wales – which is 20%. This tax code is for those who earn between £12,501 and £50,000
  • CDO: This tax code is for the higher rate in Wales of 40%, which is for those earning between £50,001 and £150,000
  • CD1: If your income exceeds £150,000, you’ll use this tax code and will be charged the additional rate for Wales, which is 45%
  • D0: The income from your job or pension will be taxed using the higher rate code if you earn over £50,001 but less than £150,000
  • D1: This is the additional rate tax code you will be charged if you are receiving from a job or pension that pays over £150,001
  • K: This code is used if you have an income for which you still owe tax, for example if you owe tax from a previous year or if you need to pay tax on benefits you receive (for example state or company benefits). This code is applied to make sure the surplus is paid.
  • L: This is the standard tax-free personal allowance for people who are born after 5th April 1948. For 2019/20 this personal allowance is £12,500
  • M: This refers to marriage allowance, and you’ll use this code if your spouse transfers 10% of their personal allowance to you. The allowance is £1,250 for 2019/20
  • N: This also refers to marriage allowance, but it’s the opposite of tax code M – it’s used when you transfer 10% of your own personal allowance to your spouse
  • NT: This stands for not taxable, so you’re not paying any tax on this income whether it’s from a job or pension
  • S: This is based on your income or pension being taxed using the rates for Scotland
  • S0T: This code still uses the rates in Scotland. It means that you’ve either used up your personal allowance, you’ve not got a P45 or that your employer doesn’t have enough information to provide you with a tax code 
  • SBR: If you’ve already used up your personal allowance and are earning between £2,050 and £12,049, then your income from this job or pension is taxed using the basic rate in Scotland (20% for the tax year 2019/20)
  • SD0: The income you receive from your job or pension is being taxed using the intermediate rate in Scotland, which is 21% for tax year 2019/20. This is if you’re earning between £12,445 and £30,930 above your personal allowance 
  • SD1: If your earning £30,931 above your personal allowance but less than £150,000 then you’ll pay 41% tax using the higher rate in Scotland for tax year 2019/20
  • SD2: This code is for those who earn in excess of £150,000 using the top rate in Scotland which is 46% for the tax year 2019/20
  • T: If your tax needs reviewing, it’s complex or your tax code includes other calculations, you’ll be given this tax code
  • 0T: If you have already used up your personal allowance, don’t have a P45 or your employers don’t have enough information to give you a tax code
  • W1/M1: This is displayed at the end of your tax code. These are emergency tax codes and could be applied if you’ve started a new job or changed to working for an employer after being self-employed

How do I check my tax code?

Once you start work HMRC will assign you a tax code. This is then used by your employers or pension providers to work out how much tax needs to be deducted from your salary or pension before you receive it. Remember, each source of income will have a different tax code, so you need to check them all.

You can check your tax code on your payslip, P60 documents which you receive at the end of the tax year, or P45 documents which you receive when you change jobs. It’s important to make sure that you have the right tax code to make sure you’re paying the right amount of tax.

What if I have the wrong tax code?

You need to contact HMRC if you think you might have the wrong tax code. If you’re paying too much tax, you’ll be able to claim it back. If it’s a refund for the tax year you’re in, you will receive your refund by using a tax code adjustment, which will mean you pay less tax on your salary until this is paid back. If the refund is for a previous year, HMRC will refund this by sending you a cheque.

On the other hand, if you’re not paying enough tax, you will have to pay this back to HMRC. If you have underpaid, HMRC can look back through your tax records for four years, or six if you have acted in a careless manner and 20 if they believe you have underpaid deliberately. In order to pay it back, HMRC may either:

  • Use an emergency tax code
  • Take more from your salary each month
  • Send you a tax bill

HMRC view tax codes as the responsibility of the individual, so it’s important to keep on top of them. However, there are some circumstances where you may not have to pay this back. If it was an underpayment of £50 or less, there’s a possibility that HMRC will write this off. Or, if it was your employer that made the mistake with your tax code, then HMRC will try to recover this from them rather than you.

What if I have more than one tax code?

HMRC will assign a new tax code to every job you have, and they will automatically apply your personal allowance to your main source of income.

It’s likely that each tax code will be different. For example, if the salary of your primary job exceeds the basic 20% tax rate and you’ve already used up your personal allowance from your main income, any additional earning will be taxed at the higher rate.

How do work-related benefits affect my tax code?

If you receive benefits from your employer for items such as a company car, accommodation or loans, these are liable to tax. This amount is taken from your salary as normal by your employer through pay as you earn (PAYE).

The tax for this is worked out on the taxable value of that benefit, which is also known as the cash equivalent value.

Not all benefits are taxable, for example childcare and canteen meals – meaning that it’s important to read up before submitting your tax return, if you have one.

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