Understanding your tax code – The ultimate guide

Your tax code allows HMRC to calculate how much income tax you need to pay each year. So what is it exactly, and what should you do if you think your tax code is wrong? 

We explore tax codes and reveal how to understand yours, how it works and how to spot problems.  

So what is a tax code?  

In a nutshell, your tax code determines how much Pay As You Earn [PAYE] tax you pay on your salary. You can spot your personal tax code on your payslip, along with your National Insurance number. 

The tax code system allows tax to be taken directly from your wages or pension before you receive the money, so it’s really important to make sure that you’re on the correct tax code, otherwise you could end up paying too much. 

What do the different tax codes mean? 

Here’s a list of the different tax codes you’ll see, and a brief description of what each one means. 

• L. You’re entitled to the standard tax-free personal allowance 

• M. You receive ten per cent of your partner’s Personal Allowance 
• N. You’ve transferred ten per cent of your Personal Allowance to your partner 
• T. Here your tax code includes other calculations to work out your Personal Allowance 
• 0T. This means your Personal Allowance has been used, or you’ve started a new job and your employer doesn’t have all the details needed to give you a tax code 
• BR. All your income from your job or pension is taxed at the basic rate 

• D0. All your income from your job or pension is taxed at the higher rate 
• D1. All your income from your job or pension is taxed at the additional rate 
• NT. This code means that you’re not paying tax on this particular income 
• S. You’re taxed using the Scottish rates 
• S0T. Your Personal Allowance under Scottish tax law has been used up or you’ve started a new job and your employer doesn’t have all the details needed to give you a tax code 

• SBR. All your income from your job or pension is taxed at the basic rate for Scotland 
• SD0. All your income from your job or pension is taxed at the intermediate rate for Scotland 
• SD1. All your income from your job or pension is taxed at the higher rate for Scotland 
• SD2. All your income from your job or pension is taxed at the top rate for Scotland 
• C. Your income or pension is taxed using the rate for Wales 

• C0T. Your Personal Allowance under Welsh tax law has been used up or you’ve started a new job and your employer doesn’t have all the details needed to give you a tax code 
• CBR. All your income from your job or pension is taxed at the basic rate for Wales 
• CD0. All your income from your job or pension is taxed at the higher rate for Wales 
• CD1. All your income from your job or pension is taxed at the additional rate for Wales 

If you have W1, M1 or X at the end of your tax code, it means you are on an emergency tax code. This usually happens when HMRC doesn’t have all your income details after you’ve changed jobs, are employed after being self-employed, or you’re receiving company benefits or a State Pension. 

How do you check your tax code?  

The first place to check your tax code is your PAYE coding notice, which is also known as a P2. This is usually sent to you by HMRC, but if you haven’t received this, then there are alternatives.

If you’re employed and receive a regular payslip, this will clearly show your pay, how it’s calculated and your tax code.

You can also find your tax code on forms such as the P45, which you get when you leave a job, and the P60, which is an annual statement of income and how much tax you’ve paid. Even if you don’t have any of these forms, you can check your tax code here. 

What do you do if your tax code is wrong? 

The most common reason for a tax code appearing wrong is because you’ve been put on a temporary emergency tax code, like those we talked about earlier.

Once your new employer has all the details on your previous job or pension, HMRC should issue a correct tax code for you.  

HMRC may also adjust your tax code if you’ve overpaid or underpaid tax. They will contact you to let you know if you need to pay more tax or are due a refund. 

Since the pandemic, many people have seen their financial status change unexpectedly. So if you’ve seen your income fluctuate, or you’ve changed jobs, it’s really important to ensure that your tax code is right, to avoid overpaying. 

Can you have more than one tax code?  

Yes you can. You’ll have more than one tax code if you have more than one job — or pension. HMRC will calculate your personal allowance based on whichever they consider to be your main source of income.

If you’d like your personal allowance to be moved to a different income source, you’ll have to ask HMRC. 

If you’re in any doubt about your tax code or you think it doesn’t reflect your financial and working circumstances, simply contact HMRC — they will be able to resolve the issue and make sure you and your tax code are exactly matched.