Tax codes are used to categorise how much tax and National Insurance you have to pay each year.
For most people in the 2020/2021 tax year, for example, the basic tax code would be 1250L. If certain circumstances apply, your tax code might be different, for instance, if you’ve got more than one job or if you and your spouse use the Marriage Allowance rules to transfer a portion of your Personal Allowances between you.
List of UK tax codes 2020/2021
|L Code||You qualify for the normal tax-free personal allowance.|
|M Code||Your partner has transferred up to 10% of their personal allowance to you.|
|N Code||You’ve transferred up to 10% of your personal allowance to your spouse.|
|S Code||You’re eligible for the Scottish rate of Income Tax.|
|Y Code||You were born before 6 April 1938. This means your Personal Allowance is higher.|
|T Code||Your Personal Allowance has some other calculations factored into it.|
|0T Code||This either means you’ve used up your Personal Allowance, you don’t have a P45 or you’ve got a new employer and they don’t have the information they need to work out your proper tax code.|
|R Code||Your income for this job (or pension) is taxed at the basic rate from the very first penny. This can happen if you’ve got another job and your allowance is attached to that one, for example.|
|D0 Code||You’re being taxed at the higher rate on all the money from this job or pension.|
|D1 Code||All of the money from this job or pension is being taxed at the additional rate.|
|NT Code||You don’t pay tax on this income at all.|
The L tax code: for most taxpayers
If you look at the list of tax codes in the UK, you’ll find they’re almost always made up of a series of numbers and a letter. The most common letter is L.
This means that you are under 65 and eligible for the standard tax-free Personal Allowance – this is the amount you can earn before Income Tax kicks in.
The basic Personal Allowance for 2020-21 (the tax year runs from April to April each year), applicable to low and middle earners with an annual income of less than £100,000, is £12,500.
This exact allowance figure (divided by 10) will precede the letter in your code. So for the 2020-21 financial year, 1250L will be one of the most common codes.
The K code: for untaxed income
Another code that many people may have is the K code. This is essentially the reverse of an L code and is used when your level of untaxed additional income exceeds your Personal Allowance.
This can happen if you are paying tax that you owe from a previous year through your wages or pension, getting State benefits that you need to pay tax on or getting benefits from work.
To take a step back: the taxman wants to know about any additional income you get from your employer – often this will be in the form of employee benefits. This income eats away and reduces your Personal Allowance.
Consider this example: your employer provides you with a brand-new BMW company car to use both on the job and at home. All your petrol is paid for, as is the licensing and tax associated with the vehicle.
The taxman will come up with a figure for the income you’re receiving from this (for personal journeys) and cut it from your Personal Allowance.
This will give you a tax code that still ends in L, but has a smaller figure preceding it.
So, if the taxman decided that you were getting £6,000 of income from your company car, you will see a code of 650L on your new tax code (£12,500 – £6,000 = £6,500).
However, if this additional income exceeds your Personal Allowance, wiping it out completely, you’ll be shunted onto a K code.
To continue our example – if the taxman decides that you’re receiving £15,000 of additional income from the company BMW, you’ll see 250K as your tax code.
This means that you need to pay Income tax on all of your earnings plus the additional income from the company car that exceeds your Personal Allowance.
The T and 0T codes: for £100,000+ income
If you’re a high-earner, the situation starts to get a little more complex.
For every £2 you earn over £100,000, you’ll lose £1 of your Personal Allowance. At this point you should be put on a T code, preceded by a figure showing the level of allowance you have left, providing any company benefits aren’t forcing you onto a K code.
When your income reaches £123,700, you’ll lose all of your allowance and your whole income will be subject to the appropriate rates of Income Tax. At this point, you’ll be put on a 0T code.
M and N codes: for the Marriage Allowance
You may be able to pass 10% of your Personal Allowance onto your spouse thanks to the Marriage Allowance.
If your annual income is £12,500 or less, and your partner is not a higher-rate taxpayer, you can pass on 10% of your Personal Allowance (£1,250 currently) to your other half.
The M code means that you have received 10% of your partner’s allowance, while the N code means you have transferred 10% of your allowance to your partner.
BR, D0 and D1 codes: for second jobs and pensions
You’ll usually receive a tax code for each source of income you receive.
If you have more than one income, you’ll be asked to state which is your main source, and this will have the appropriate level of Personal Allowance applied to it.
All other income will all be taxed without any allowance. If you pay at basic rate, additional income sources will receive a BR code, higher rate payers will get a D0 code and those liable for the additional rate will get the D1 code.
The NT code: when you pay no tax
An NT code will come through if no tax is to be taken.
This could be because your total income is less than your Personal Allowance, or you’re a self-employed contractor who is liable to pay National Insurance but not Income Tax.
W1 and M1: emergency tax codes
An emergency tax code is issued if HMRC does not have enough information about you to send your employer the correct code.
This usually happens if you start your first job and get your first source of income part of the way into the financial year, or you haven’t got a P45 from a previous employer.
The first part of the emergency tax code for 2020-21 is 1250 – the same as the basic Personal Allowance code. This normally ensures you receive the basic amount of monthly tax-free pay. But it doesn’t take into account any other relief or allowances.
However, there will also be either W1 (for weekly pay) or M1 (for monthly pay). This signifies that you are being taxed as if it is the first week or month of the financial year.
If you start work part of the way into the year, a W1 or M1 code could see you overpay in tax – as it is spreading your Personal Allowance over too many months.
For example, if you start your first job five months into the financial year, you should receive a seventh of your Personal Allowance in each monthly wage packet. A W1 or M1 code will only give you a twelfth – meaning that you will be overpaying.
However, when you hand over your P45 or P46 to your new employer, your tax code should change – and you should be reimbursed with any losses.
If you get to the end of the financial year and still haven’t been reimbursed with the overpaid tax, you should get it back in a refund.
If your tax code is wrong
If you think your tax code is wrong you need to tell HMRC as soon as possible so it can be corrected.
You’ll need to have your tax reference and National Insurance number to hand – these can be found on your payslips or any letters from HMRC.
You can get hold of all of the contact details for HMRC by heading to its website.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
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