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Tax codes

Tax codes - What are tax codes?

Tax codes are codes used by employers and pension providers to calculate the amount of tax to be taken from an indivdual's pay or pension.

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In the UK, every employee who is registered under the PAYE scheme is given a tax code by HMRC. Tax codes usually consist of a number followed by a letter.

What does a tax code mean

The number in a tax code is the amount of tax-free income you should get that particular year. This is based on your tax-free Personal Allowance; any income that you haven’t paid tax on; and the monetary value of company benefits such as cars, accommodation, or loans.

The letter in your tax code refers to personal circumstances which may affect your Personal Allowance – for example, L refers to the standard tax-free Personal Allowance; M and N refer to Marriage Allowance, whereby 10% of a partners’ income is transferred to their husband, wife or civil partner; S is income or pension taxed according to Scottish rates.

The HMRC website has a list explaining the meaning of each letter in a tax code.

Emergency tax codes

Emergency tax codes are temporary codes which assume that you are only entitled to the basic Personal Allowance. Because an emergency tax code does not take into account any other allowances, reductions, or reliefs you are entitled to, emergency tax can be up to 50% of your monthly wage or income.

You will be given an emergency tax code if HMRC cannot access all the information they need to calculate your tax code correctly. Emergency tax codes are temporary and you should recieve a correct tax code as soon as HMRC has all of the required information.

If you have been given an emergency tax code, your payslip will show the codes:

  • 1150 W1
  • 1150 M1
  • 1150

Updating your tax code

Tax codes are typically adjusted once a year in line with any changes made in the National Budget. However, tax codes can also be altered at additional intervals if the employee’s circumstances change.

For example, an individual’s tax code may need to be changed if they over or underpaid tax the previous year, if they start receiving benefits from the state, or if they start earning income outside of the PAYE scheme.

To ensure that you receive the correct tax code, HMRC will update your tax code when:

  • You receive a P45.
  • You earn additional income from another job or pension.
  • Your income changes.
  • Your company benefits change.
  • You start receiving taxable state benefits.
  • You start to claim tax relief or Marriage Allowance.

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