A tax code is a series of numbers and letter(s) used to determine Income Tax contributions. Your employer or pension provider uses this code to deduct your tax and work out how much tax-free income you receive.
HMRC will then apply your tax-free Personal Allowance, and determine the tax you haven’t paid on earnings as well as the value of any work benefits (effectively answering the question of ‘how much tax do I pay?’). What’s left of your earnings is yours to keep.
Having the wrong HMRC tax codes means your earnings aren’t being effectively calculated. In other words, you’re either paying more than you need to or you’ll be struck with a bill you really don’t want.
This all highlights the importance of having tax codes explained. So, in order to help answer ‘what do tax codes mean?’, we’ve provided an in-depth analysis of each and how they affect you.
Numbers And Tax Codes Explained
The numbers within UK tax codes are a direct reference to the amount of tax-free income you get that tax year. Typically, you multiply the number in the tax code by 10 to get the total amount of income you can earn before being taxed – for example, if you have the tax code 1250L, you can earn £12,500 before being taxed.
One of the most common tax codes in 2019 is 1250L, but this changes in relation to the amount of tax-free income you receive (2018’s most common code was 1185L, for instance). In most cases, this is used for people with one job and no untaxed income, unpaid tax or taxable benefits (like a company car).
What The Letters Of Tax Codes 2019 Mean
Unlike the numbers of tax codes 2019, the letters can be much more different. The letter refers to your personal situation and can detail everything from your relationship circumstances to your pension.
Still asking yourself ‘what do tax codes mean?’ Let’s provide some clarity.
Here’s a list of the letters you may find on the end of HMRC tax codes:
- C – Tax is deducted from income in the Welsh tax bands. This is used if your main home is in Wales.
- S – Tax is deducted from income in the Scottish tax bands. This is used if your main home is in Scotland.
- 0T – Tax is deducted from all income, and you receive no Personal Allowance. This is often the case when you haven’t given an employer a P45 or enough details to work out your tax code. Alternatively, your Personal Allowance may have been used up.
- C0T – Welsh equivalent of 0T.
- S0T – Scottish equivalent of 0T.
- BR – Tax is deducted from all income at the basic rate (20% as of 2019/20). This is most often used for a second job or pension scheme.
- CBR – Welsh equivalent of BR.
- SBR – Scottish equivalent of BR.
- D0 – Tax is deducted from all income at the higher rate (40% as of 2019/20). This is most often used for a second job or pension scheme.
- CD0 – Welsh equivalent of D0.
- SD0 – Scottish equivalent of D0.
- D1 – Tax is deducted from all income at the additional rate (45% as of 2019/20). This is most often used for a second job or pension scheme.
- CD1 – Welsh equivalent of D1.
- SD1 – Scottish equivalent of D1.
- SD2 – Tax is deducted from all income at the top rate in Scotland. This is most often used for a second job or pension scheme.
- L – Tax is deducted at basic, higher and additional rates depending on the amount of taxable income. This is often used if you’re entitled to the standard tax-free Personal Allowance.
- M – Tax is deducted at basic, higher and additional rates depending on the amount of taxable income. This is used if your spouse or civil partner has transferred some of their Personal Allowance (10% under the Marriage Allowance scheme).
- N – Tax is deducted at basic, higher and additional rates depending on the amount of taxable income. This is applied to you if you’ve transferred some of your Personal Allowance to your spouse or civil partner (10% under the Marriage Allowance scheme).
- NT – No tax is deducted. This is only used in very specific cases, but it’s applied to you if you’re classed as self-employed and therefore not subject to PAYE.
- T – Tax is deducted at basic, higher and additional rates depending on the amount of taxable income. This is used if HMRC needs to review some items with you.
Always asking yourself ‘how much tax do I pay?’ Check with your employer. You need to be certain that it’s correct to avoid any unnecessary charges or fees. If you believe it’s wrong, contact HMRC as soon as you can.
What Is Emergency Tax And How Much Tax Do I Pay?
If you don’t provide your employer with the details they need (such as any benefits you’re receiving, allowances you’re claiming, or income you’re getting from another job or pension), you’ll find yourself on an emergency tax code. This means you’ll be taxed on any income over your basic Personal Allowance.
An emergency tax code is temporary, but you’ll need your employer to change your information before you can reduce your tax liability.
You can find out whether or not you’re paying emergency tax if the following letters are attached to your tax code:
- W1 – This refers to Week 1.
- M1 – This refers to Month 1.
Either will appear at the end of your code (like 1250W1) to determine what you paid specifically during the period of uncertain tax information. HMRC sometimes uses X on UK tax codes which encompasses W1 and M1.
Similarly, if your tax code has the letter K at the very beginning (for example K1250), there are additional deductions due – usually from company benefits, state pension or any tax owed as a result of incorrect bracketing.
Tax codes can be a minefield. With the seemingly endless combinations of letters and numbers, only those in the know would immediately recognise what theirs means for their tax liability.
As we’ve covered, the majority of taxpayers in 2019/20 will recognise 1250L as their own tax code. However, those that have W1 or M1 included should immediately address the issue with their employer or HMRC.
If you’re uncertain about any of the above information and would like further guidance on working out your tax codes, check out the GOV.UK website. From there you can ensure you are acting lawfully and that, provided you’ve given the correct details, all your tax contributions will be correct.
If you’d like to stay in the loop with your tax liabilities, GoSimpleTax is the software for live updates. Our Self Assessment software ensures compliance against the most complex of tax legislation and reduces accounting costs significantly. If you’d like complete guidance on HMRC tax codes and other tax queries, contact our team today.