A Guide to Tax Code in the UK

Published by Susan Basnet
Posted Date: June 6, 2024 , Modified Date: June 6, 2024
Categories: Tax

Have you ever wondered how your employer or pension provider knows how much tax to take from your pay? It's all about tax codes. Join us as we explore how tax codes work in the UK.

Tax Codes: What They Mean!

A tax code, a blend of numbers and letters, serves as the tool for your employer or pension provider to compute the income tax deduction from your pay or pension. HMRC communicates the applicable tax codes to employers and pension providers.

A common tax code for those with a single job or pension is 1257L, where the letter L denotes eligibility for the standard tax-free personal allowance. While the numbers in your tax code tell your employer or pension provider how much tax-free income you get in that tax year, the letters refer to your situation and how personal allowance is affected. Therefore, taxpayers get different tax codes, depending on their situations.

For example, if a tax code starts with ‘K’, it indicates that you have untaxed income exceeding your tax-free allowance, such as taxable state benefits or company benefits.

Beyond the general tax codes ending in L or the ones beginning with ‘K’, there are many tax codes you may be assigned and the meaning of each may be different. To understand the meaning of the numbers and letters in your tax code, determine your tax liability, and explore the next steps, you can use HMRC’s tax code checker.

Discovering your tax code is easy through your personal tax account, the HMRC app, your payslip, or a 'Tax Code Notice' letter from HMRC.

Change in Your Tax Code

In specific situations, HMRC might adjust your tax code. These circumstances include:

  • Commencing a new source of income from an additional job or pension
  • Changes in your weekly State Pension amount
  • Your employer informing HMRC about the commencement or cessation of benefits from your job
  • Receipt of taxable state benefits
  • Application for Marriage Allowance
  • Claiming expenses that qualify for tax relief
Tax code in the UK

Emergency Tax Code

An emergency tax code is assigned when HMRC does not receive timely updates about your income, particularly after significant changes such as starting a new job, receiving company benefits, or beginning to receive the state pension. These temporary tax codes typically end in ‘W1’, ‘M1’, or ‘X’. The emergency tax code is lifted as soon as HMRC receives the updated employment details if you pay the correct amount of tax for the year.

Updating Your Tax Code

In most instances, HMRC automatically updates your tax code when they receive information about changes in your income from your employer. However, if there is incorrect information or a delay in reporting your income, your tax code may be inaccurate. In such cases, it is essential to correct your tax code by providing HMRC with updated income details.

As previously highlighted, incorrect tax codes can result from either a lack of employment details or unreported changes in income. You can rectify these situations by using HMRC’s ‘Check your Income Tax  online service’ or by directly contacting HMRC.

Upon receiving the updated information, HMRC will notify you of the change in your tax code. They will also inform your employer or pension provider about the adjustment in tax code.

Subsequently, your next payslip should reflect the new tax code, along with any necessary adjustments to your pay if you were previously paying an incorrect amount of tax.

Tax Overpayment or Underpayment

If you have underpaid taxes due to an incorrect tax code, HMRC will send you a simple assessment letter detailing the tax bill for the year. This letter will include a 14-character payment reference number starting with ‘X,’ which is required when making the payment. In case of disagreement with HMRC’s tax computation, you have the right to appeal, and the appeal procedure will be outlined in HMRC’s decision letter.

On the contrary, if HMRC discovers an overpayment in taxes, you will receive a tax calculation letter (P800). This letter will provide instructions on how to claim your refund—either by claiming online or receiving a cheque.

Preparing Payroll Records for The Year 2024/25

To get ready for the new tax year 2024/25, Employers must take multiple steps, such as prepare a payroll record, identify the correct tax code, and enter the correct tax code on the payroll record for each employee who will be working for them on or after 6 April 2024.

tax codes in the UK

Employees without a new tax code

For employees without a new tax code, preparing the payroll records is fairly straightforward as it just involves copying the authorised tax code from the 2023 to 2024 payroll record and continuing to use for the new year.  Be careful not to copy or carry over ‘week 1’ or ‘month 1’ markings.

Employees with a new tax code

To set up payroll records for employees with a new tax code, employers should discard any form P9(T) or other tax code notification for the same employee with an earlier date, transcribe the tax code from the form P9(T) or other tax code notification onto your payroll record, and revise the tax codes when received.

Employees leaving

There is no change in the tax code of employees who leave before 6 April, even if they’ll be paid after 6 April.

However, if you’ve already given an employee a P45 and you’ll be paying them after 6 April. In such circumstances, tax must be deducted using tax code 0T, S0T for employees who had an S prefix in their code or C0T for employees who had a C prefix in their code, on a non-cumulative basis.

New employees

If an employee starts between 6 April 2024 and 24 May 2024 and gives you a P45, follow HMRC’s instructions.

If you’re an employer who has an agreed exemption from online filing and are operating a manual payroll, follow the instructions in the RT7, ‘Guidance for employers exempt from filing Real Time Information online’.

Conclusion

To sum up, a tax code is like a key to how much tax you pay to HMRC. Whether it's the common 1257L for standard allowances or the special 'K' codes for untaxed income, each code tells a unique story.

Mistakes in tax payments can happen if your income details are outdated, so keeping them up to date with HMRC is crucial. As the new tax year approaches, employers have extra tasks in maintaining accurate payroll records.

Need expert advice on Tax code and taxation in the UK?

Contact us today for efficient and hassle-free assistance.

Susan Basnet
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