What is a tax code?
A tax code is a set of laws and regulations set by the government to establish the assessment and collection of taxes. Tax codes are used as a framework to determine the amount of tax an individual or business must pay based on their income, expenditures, assets and other financial activities, and are designed to ensure that individuals and businesses contribute towards the funding of government services and programs.
How to read and interpret your Tax Code
Let’s take the standard 1257L tax code for the 2022-23 tax year.
The numeric portion of this tax code indicates the amount of personal allowance (income earnt tax free) an individual is entitled to per year - which in this case is £12,570 yearly, or £242 weekly.
Additionally, the letter shows the type of allowance, which in this case, is a single person.
There are several suffixes which can be used to distinguish an individual’s type of allowance including:
- ‘L’ - single person allowance
- ‘T’ - temporary allowance
- ‘M’ - recipient of Transferable Tax Allowance. You will be placed on this code if you are an employee whose spouse or civil partner has transferred some of their personal allowance.
- ‘N’ - transferor of a Transferable Tax Allowance. You will be placed on this code if you are an employee who has transferred some of their personal allowance to their spouse or civil partner.
Common tax codes
Emergency tax code
An emergency tax code indicates that you will pay tax on all your income above the basic personal tax allowance.
If you are on an emergency tax code from April 2022, your payslip will show:
- 1257L W1 - This tax code will apply to you if you are paid weekly
- 1257L M1 - This tax code will apply to you if you are paid monthly
- 1257L X - This tax code will apply to you if your pay period is non-standard or unknown
Basic Rate or BR tax code
The Basic Rate tax code indicates that all earnings are taxed at the current basic tax rate of 20%, with no allowances applicable. The BR code is used when an individual has multiple jobs or a pension whereby their allowances have already been given against that income.
What are the tax code thresholds and rates for the 2023/24 tax year?
The standard personal allowance for the 2023 to 2024 tax year is £12,570.
Your earnings for the tax year will determine how much tax you must pay based on the band that you are placed into:
|
Band |
Taxable income |
Tax rate |
|
Basic rate |
Up to £37,700 |
20% |
|
Higher rate |
£37,701 to £125,140 |
40% |
|
Additional rate |
Above £125,140 |
45% |
If you require further support on your understanding your payslip, you can head over to our umbrella payslip guide or alternatively, watch out short walk-through on the umbrella payslip:
Understanding your umbrella payslip
When you work via an umbrella company, by law, you’ll be subject to pay company overheads such as apprenticeship levy and employer national insurance contributions.
Our short blog covers what company overheads are and why they're being deducted from your pay.
FAQs
You may be placed on an emergency tax code if HMRC does not receive your income details in time after a change of circumstances. For example, a new job, working for an employer after being self-employed or claiming company benefits.
If you believe your tax code is incorrect you should contact HMRC on the following number - 0300 200 3300
The most common way to check your tax code is by checking your payslip, P45 from your previous employer, or P60 from your current employer.
If you don’t have a P45 issued from your previous employer, you may be asked to complete HMRC’s Starter Checklist. The starter checklist is an online form consisting of a series of questions relating to your employment history, and once completed will allow your employer to manually determine your tax code.