Tax codes and their meanings

It’s important to understand your tax code as you could identify any potential issues that may arise if you know what you are looking at. Below is a guide to the codes and there meanings.

The L code: This is most taxpayers

Tax codes are usually 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 2018/19, applicable to low and middle earners with an annual income of less than £100,000, is £11,850.

This exact allowance figure (divided by 10) will precede the letter in your code. So for the 2018/19 financial year, 1185L will be one of the most common codes.

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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 you owe from a previous year through your wages or pension

  • Getting state benefits that you need to pay tax on

  • Getting benefits from work

HMRC needs to know about any additional income you get from your employer i.e. employee benefits. This income goes towards reducing your Personal Allowance.

For example:

Your employer provides you with a brand-new Audi company car to use both on the job and at home. Your petrol, the licensing and tax associated with the vehicle are all paid for.

The HMRC 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 850L on your new tax code (£11,850 - £6,000 = £5,850 or £850).

If the additional income exceeds your Personal Allowance you will be issued with a K code.

A K code 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 S code: Scottish Income Tax

This code is used to indicate if your income or pension is taxed using the rates in Scotland.

Your tax code will be S1185L if you pay Scottish Income Tax and get the standard Personal Allowance.

The T and 0T codes: £100,000+ income

If you are a high salary earner, the situation starts to get a slightly 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.

If your income reaches £123,000, 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 issued a 0T code.

M and N codes: 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 £11,850 or less, and your partner is not a higher-rate taxpayer, you can pass on 10% of your Personal Allowance (£1,185 currently) to your other half.

  • The M code means that you have received 10% of your partner's allowance

  • The N code means you have transferred 10% of your allowance to your partner.

BR, D0 and D1 codes: 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 will need to identify 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 personal allowance. If you pay at basic rate:

  • Additional income sources will receive a BR code

  • Higher rate payers will get a D0 code

  • Those liable for the additional rate will get the D1 code

The NT code: Paying 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 means HMRC does not have enough information about you to send your employer the correct code.

This is common with your first job and if you 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 2018/19 is 1185L. You will notice this is the same as the basic Personal Allowance code. This is done so 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 - Weekly pay 

  • M1 - Monthly pay

This signifies that you are being taxed as if it is the first week or month of the financial year.

Be aware 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 simply spreading your Personal Allowance over too many months. 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 it will be issued as a refund.