Tax Code

A tax code is the instruction HMRC gives your employer about how much of your pay to treat as free of income tax. The number is your tax-free amount for the year with the final digit removed, so the standard code 1257L carries £12,570 of tax-free pay, spread evenly across your pay periods. The letter describes your situation rather than the amount: L is the standard Personal Allowance, M and N are the two halves of Marriage Allowance, T marks a code containing items HMRC reviews individually, and a K prefix is a negative allowance, used where taxable benefits or unpaid tax from an earlier year exceed the allowance.

Prefixes matter as much as suffixes. S means your main home is in Scotland and Scottish rates apply; C means Wales. BR taxes the whole of that job at the basic rate, D0 at the higher rate and D1 at the additional rate, which is normal on a second job where the allowance is already used by the first. A code of 0T gives no allowance at all and applies each band in turn.

A code is also either cumulative or non-cumulative. A cumulative code looks at your pay and tax for the whole year to date at every payday and corrects itself. A code marked W1, M1 or X looks only at the current period, so it can neither repay an over-deduction nor collect an under-deduction. That marker is the single most common reason a payslip looks wrong while the code on it looks right.

Your code is only as good as the information behind it. HMRC builds it from employer submissions, pension providers, benefits reported on a P11D and any estimate it holds of untaxed income. If a benefit has ended, a job has ended, or an estimate is stale, the code is stale with it. Check it against the coding notice HMRC sends and against your personal tax account, and ask HMRC to amend it rather than waiting for the year-end reconciliation to hand you a refund.