Tax codes might look like a jumble of letters and numbers, but they play an important role in making sure employees pay the right amount of tax. For employers, understanding these codes is essential to ensure payroll is accurate and HMRC obligations are met.
What is a UK tax code
A tax code tells employers how much income tax to deduct from an employee’s pay through the Pay As You Earn (PAYE) system. Each employee has their own tax code, which is based on their personal allowance, benefits, and any adjustments HMRC makes.
How are tax codes structured
Tax codes are usually made up of:
- Numbers – representing how much tax-free income an employee can earn. For example, 1257L means the employee has the standard personal allowance of £12,570 for 2025/26.
- Letters – showing specific circumstances that affect tax.
Common UK tax codes explained
Tax Code |
What it Means |
When it’s Used |
|
1257L |
Standard personal allowance (£12,570 in 2025/26). |
Most employees with no adjustments. |
|
BR |
All income taxed at 20%. |
Often used for a second job or pension income. |
|
D0 |
All income taxed at 40%. |
When income is fully taxed at the higher rate. |
|
D1 |
All income taxed at 45%. |
When income is fully taxed at the additional rate. |
|
K codes |
Negative allowances – tax collected on benefits or underpayments. |
When deductions (e.g. benefits, owed tax) are greater than allowances. |
|
M / N |
Marriage Allowance transfer. |
M – received 10% of partner’s allowance; N – transferred 10% to partner. |
|
T |
Other calculations required by HMRC. |
Used when special adjustments are needed. |
This table covers the tax codes most employers are likely to see in their payroll system.
How HMRC issues and updates tax codes
HMRC provides tax codes directly to employers, usually through PAYE notices (P6 or P9). Codes may change if:
- An employee’s circumstances change (e.g. new job, benefits in kind, pension contributions).
- Marriage Allowance is claimed or stopped.
- An underpayment or overpayment from a previous year needs to be adjusted.
Employers should always use the latest code issued by HMRC and apply it to payroll as soon as possible.
What to do if a tax code looks wrong
Sometimes employees may query their tax code if they think too much or too little tax is being deducted. Employers should:
1. Check the latest HMRC notification.
2. Encourage employees to review their Personal Tax Account online.
3. Apply only the tax code HMRC has instructed – employers should not make changes themselves.
Why tax code accuracy matters
Using the wrong tax code can:
- Leave employees paying too much or too little tax.
- Create cashflow problems if HMRC reclaims underpaid tax.
- Lead to payroll errors and compliance issues for the business.
How Haines Watts can help
Navigating PAYE rules and HMRC updates can be complex. At Haines Watts, we help employers ensure their payroll is accurate, compliant, and stress-free. From reviewing tax codes to managing benefits in kind and PAYE reporting, our payroll and tax experts can give you peace of mind that your team is being paid correctly.
