The UK tax system is complex. And there’s a lot of information contained in the (usually) four numbers and one or two letters than make up your tax code. If staff regularly ask you what their tax code means, share this with them…
Each payday, your payroll department or outsourced payroll provider issues every member of the team a payslip. Each payslip details how much has been deducted for tax, and the amount deducted is determined by each individual’s tax code.
Most of us pay a significant amount in tax, so you might assume that we’re all completely clued up on exactly how much we pay, and what our tax codes mean. The reality seems rather different.
According to a Deloitte survey in 2019, and as reported by the FT, almost half of people surveyed didn’t know what a standard tax code meant. Accountancy firm BDO did its own survey and found more than half didn’t understand their tax code.
So let’s put that right.
What does a standard tax code look like?
For most people with one job or pension, your tax code in FY23/24 will be 1257L. The first four numbers indicate your tax-free allowance (if you add an additional 0), that is, the amount you can earn each year free from tax.
This year, the tax-free allowance is £12,570.
The L suffix simply means that you’re on the standard tax-free Personal Allowance.
What might a non-standard tax code look like?
Although most of us will be on a standard tax code, many will have a different code. That might be because you’ve got more than one job and the tax code has already been applied to the first job, leaving the second one taxed at the basic rate. In this case, your payslip would show suffix BR.
If you’ve transferred 10% of your Personal Allowance to your partner under the Marriage Allowance rules, your tax code will have an N at the end, while your partner’s code will be an M.
If you’ve just started a new job and your employer doesn’t have the information they need to assign you a tax code, you may be given an OT code. Alternatively, you may temporarily be put on an emergency code (W1, M1 or X).
If you live in Scotland or Wales and any of the above apply, you may get an additional ‘S’ or ‘C’ (Cymru) in your code.
And if there’s a K at the front of your code it signifies that, as HMRC notes, “you have income that is not being taxed another way and it’s worth more than your tax-free allowance.”
You might get a K as part of your tax code if you’re paying tax from a previous year, or if you’re receiving taxable benefits (state or company).
Because each of the above codes will affect the amount of Personal Allowance, you’ll find the four digits change accordingly, reflecting the amount of tax-free allowance used to calculate your wages.
You can find a full list of tax code suffixes here.
Are you on the right tax code?
Despite the fact that many of us pay little attention to the tax code on our payslips, it’s important to understand what your tax code means, so you can spot if there’s a problem. In the BDO survey mentioned earlier, almost half of employers said that employees had complained about tax code errors.
Inevitably, a tax code error will either mean that you’ve been paying too much tax (if, for example, you’ve been on an emergency code for a prolonged period). Or it will mean you’ve been paying too little, in which case HMRC will expect you to make good the shortfall, which they may do by altering your tax code so you pay more tax.
Check your tax code
Next time you receive your wage slip, check the tax code. Check what the code means. And then, if you believe there may be a problem, talk to your payroll team.
Want to make managing tax code changes easier? Talk to us about outsourcing your payroll now.