Tax codes are issued by HM Revenue and Customs (HMRC) and used by employers to calculate how much Income Tax to deduct from an employee's taxable pay.
After creating a new starter following the guidance on 'How do I know what tax code I should use for an employee?' If HMRC identifies an employee on an incorrect code they will issue an official Employers communication which will tell them which code to use to collect the right tax.
What a tax code means:
Tax codes will normally start with a number and end with a letter. As an Example '1185L' is the tax code used for most people who have one job or pension in 2018/19 tax year.
What is the number refer to?
The numbers in a tax code tell you as an employer or pension provider how much tax-free income someone gets within a tax year.
HMRC works out an employees' tax-free Personal Allowance.
Income that employee hasn't paid tax on (such as untaxed interest or part-time earnings) and the value of any benefits from employees' job (such as a company car) are added up.
The income that employee hasn't paid tax on is taken away from their Personal Allowance. What’s left is the tax-free income employee is allowed in a tax year.
The last digit in the tax-free income amount is removed.
What the letter means
Letters in a tax code refer to an employees' situation and how it affects their Personal Allowance.
| Letter | What it means |
|---|---|
| L | Employee entitled to the standard tax-free Personal Allowance |
| M | Marriage Allowance: Employee received a transfer of 10% of their partner’s Personal Allowance |
| N | Marriage Allowance: Employee transferred 10% of their Personal Allowance to your partner |
| S | Employees' income or pension is taxed using the rates in Scotland. |
| T | Employees' tax code includes other calculations to work out their Personal Allowance, for example it’s been reduced because their estimated annual income is more than £100,000 |
| 0T | Employees' Personal Allowance has been used up, or they’ve started a new job and you as their new employer don’t have the details they need to apply another tax code |
| BR | All Employees' income from this job or pension is taxed at the basic rate (usually used if they’ve got more than one job or pension) |
| D0 | All Employees' income from this job or pension is taxed at the higher rate (usually used if they’ve got more than one job or pension) |
| D1 | All Employees' income from this job or pension is taxed at the additional rate (usually used if they’ve got more than one job or pension) |
| NT | Employee isn't paying any tax on this income. |
Q: What does ‘W1’ or ‘M1’ at the end of a tax code mean?
A: These are emergency tax codes - Each pay period is treated as if it were the first pay period of the tax year, figures are not cumulative/tax year to date..
Q: What does a tax code beginning with a ‘K’ mean?
A: Tax codes with ‘K’ at the beginning mean an employee has income that isn’t being taxed another way and it’s worth more than their tax-free allowance.
For most people, this happens when you’re:
- paying tax they owe from a previous year through their wages or pension
- getting benefits they need to pay tax on - these can be state benefits or company benefits.
Employers and pension providers can’t take more than half of an employees pre-tax wages or pension when using a K tax code.