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From how tax is collected to how much you can earn before paying tax, the UK tax system can be a tricky subject to wrap your head around at the best of times.
However, your tax code can make a huge difference to how much is tax is deducted from your wages and, more importantly, the amount of money you take home at the end of the month, so it’s important to ensure yours is right.
This article will provide a complete guide to tax codes in the UK, including:
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The words ‘tax code’ can sound daunting, but the definition is actually quite straightforward. Put simply, a tax code is a combination of numbers and letters assigned to you by HM Revenue & Customs (HMRC) that tells your employer how much income tax to deduct from your wages each month.
The code assigned to you also dictates how much tax-free income you should receive in a single tax year (known as your personal allowance or tax-free allowance) and is based on your personal and financial circumstances.
To break this down even further, the numbers indicate your personal allowance amount while the letters indicate any special circumstances. For example, the tax code 1257L means, if you don’t receive any other income, you can earn up to £12,570 (1257) before being taxed and you qualify for the normal tax-free personal allowance (L). This means that, if you earn £27,000 a year, your taxable income will be £14,430.
Everyone in the UK who is employed or receives income through Pay As You Earn (PAYE) has a tax code, including both full-time and part-time employees and individuals with a private pension.
However, you won’t have a tax code if you’re fully self-employed or a sole trader because all your income will be taxed through self-assessment.
When you start a new job or take out a new pension, your employer or pension provider will work out your tax code using your P45. They will then use this information to determine how much income tax to deduct from your pay or pension going forward.
Usually, your tax code will be updated at the start of every tax year (April 6) to reflect what HMRC believes your financial circumstances will be for the next 12 months. When this happens, your employer will receive an email instructing them to update their payroll records as soon as possible.
The information your employer receives will be based on your previous year’s income as well as any other details you provided to HMRC about your financial or employment situation. So, as long as the information HMRC has on you is accurate and up to date, your tax code, and therefore amount of tax deducted from your wages for the coming year, should be correct.
There are several places you can find your tax code, including:
There are several tax codes in the UK, all with different meanings. Here is a comprehensive guide to tax codes and what they mean:
The most common tax code for the 2022/23 year is 1257L, which reflects the standard tax-free allowance and is assigned to individuals with one job or pension. This is currently estimated to apply to around 20 million people in the UK.
Because the personal allowance threshold is currently frozen, 1257L is expected to remain the most common tax code until at least 2027.
W1, M1, or X are emergency tax codes and indicate that you’ll pay more tax on all your income above the basic personal allowance.
Usually, they are only used as a temporary measure if HMRC hasn’t been provided with enough information after a change of circumstances, for example, if you have a new job, are working for an employer after a period of self-employment, or are receiving taxable benefits or the State Pension.
HMRC will update your tax code for the remainder of the tax year once it has received the correct details from you or your employer. However, if your change in circumstances means you didn’t pay enough tax, you’ll stay on an emergency tax code until you’ve repaid the correct amount for the year.
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There are several ways to update your emergency tax code to ensure you’re being taxed the correct amount, and your employer can help speed up the process by sending details about your previous income to HMRC.
Provide your employer with your P45 from your previous job. This will show how much you’ve earned and how much tax you’ve paid on your salary in the most recent tax year.
When you start a new job, your employer may provide you with a ‘starter checklist’ (P46). This should be completed with details of all income received in the most recent tax year, including employment and benefits.
Check your tax code online to ensure it includes the company benefit or State Pension. If it’s not included, you must update your details online or contact HMRC.
The emergency tax code will stay in place until the end of the current tax year to ensure you’re paying the right amount of tax before being switched to a regular tax code at the start of the new tax year.
A K tax code indicates that your tax deductions owed to HMRC from previous years are greater than your personal allowance.
This can happen for several numbers but typically happens because you’ve received a benefit from your employer, such as a company car or house, that you need to pay tax on, or you get taxable benefits from your company or the Department for Work and Pensions (DWP).
However, you may also be issued with a K tax code if HMRC are trying to collect debt from a previous tax year they believe you still owe, for example if you have a penalty for filing a late tax return.
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While most tax codes are calculated correctly, mistakes can happen for several reasons. For example, if your circumstances have changed, a company benefit has been added or taken away, or you didn’t claim tax relief for expenses you were entitled to allowances for.
This could mean you are due a tax rebate if you were overpaying, but could also lead to you receiving a tax bill if you are found to be underpaying.
The first thing you must do if you think your tax code is wrong is check using the calculator on the GOV.UK website here.
Alternatively, talk to your employer to ensure the correct tax code was entered into the payroll system.
There are several ways to claim a tax refund if you had a tax code that led to you having overpaid tax.
Typically, you will receive a P800 letting you know that you are due a tax refund and how to claim it through the UK government website. This will require you to sign into your personal tax account and answer a set of questions.
Alternatively, you can call HMRC on 0300 200 3300 (Monday to Friday 8am to 6pm), ensuring you have all the relevant financial documents to hand.
Applications can take anything from a few days to a few weeks to process, but the money be in your bank account within five working days.