First things first - what is a tax code?
A tax code is used to inform employers of exactly how much income tax and pension an individual is liable to pay. Tax codes are delivered by HM Revenue and Customs (HMRC) via a P45 document and generally consist of several numbers followed by a letter.
Understanding 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 £241.73 weekly. Additionally, the letter shows the type of allowance, which in this case, is a single person.
There are several suffix’s 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.
What happens if I don’t have a P45?
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.
Your answers from the starter checklist will place you onto one of three tax codes:
- A – an emergency tax code on a cumulative basis (all earnings and tax credits from 1 January of that year are gathered as one)
- B – an emergency tax code on a non-cumulative basis (an employee’s tax is calculated on a “week 1/month 1” basis to the current tax period only)
- C – a BR tax code on a cumulative basis
Common tax codes to be aware of
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
- 1257L M1
- 1257L X
M1 will be applied if you're paid monthly, while W1 will be used if you're paid weekly. If your pay period is non-standard or unknown, your tax code might end in X.
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.
BR
The BR 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 is cumulative operation?
PAYE operates on a cumulative basis, due to a person’s tax liability being based on their total taxable income throughout the tax year.
This means that in each period:
- Any tax due is calculated on the total taxable earnings in the tax year to date
- Any personal tax allowances are apportioned over the tax year
- Any tax charged is the difference between the total tax due and the tax paid to date
What is non-cumulative operation?
Non-cumulative operation is where an employee’s tax is calculated on a “week 1/month 1” basis to the current tax period only, with any previous earnings and tax paid in the current tax year ignored.
At the end of the tax year, the total liability is calculated by HMRC and any remaining underpayments are collected through the Self-Assessment process or by reducing the tax code appropriately in the following tax year to a ‘K’ prefix.
What are the changes from April 2022?
The standard personal allowance for 2022 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 |
|
Personal Allowance |
Up to £12,570 |
0% |
|
Basic rate |
£12,571 to £50,270 |
20% |
|
Higher rate |
£50,271 to £150,000 |
40% |
|
Additional rate |
over £150,000 |
45% |
If you require further support in understanding your payslip, you can head over to our blog here.
Still need some advice?
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