Tax is one of the most important things that businesses need to be completely informed about. Whether you have a small-scale business or you are managing a corporation, it is very important to be informed about every small information that is important related to taxes. One of these crucial things that you need to know about is Tax Codes.
Tax codes are important things that people need to know about, and in this article, we will provide you with a complete understanding of UK Tax codes, what they signify, how they are calculated and the different reasons that can lead to their changing. The article will also mention the method through which you can check your tax code when you need to find out about it.
Introduction to a Tax Code
The tax code is a simple combination of numerous letters and numbers that might appear harmless; however, if even a single number in this combination is placed incorrectly, then it can result in numerous issues for you. In the United Kingdom, if you are paid under the PAYE system, then your tax code is essential as it informs your employer how much income tax should be deducted from your pension or salary.
HMRC informs your employer or pension provider about the tax code that they can use, as it is used to determine the amount that should be deducted from your salary. After calculating it correctly, your employer will pay you the deducted salary. If your employer has the wrong tax code, then this can mean that your pay can be deducted too little or too more.
What is the process behind assigning tax codes?
As we have already mentioned, tax codes are created using a set of letters and numbers like 2034H. The number informs your pension provider or employer about the money that you earn without paying any taxes. HMRC observes your personal allowance and other untaxed income that you receive to determine this number. They also take into consideration the other benefits that you can receive as part of your job, like a car or health insurance.
Your personal allowance is reflected in the letters in your tax code, therefore demonstrating your individual circumstances’ impact. The letter L is the most frequent and denotes your right to the regular personal allowance. Among other examples are N, which shows you have utilised the marriage allowance to transfer 10% of your allowance to your civil partner or spouse, and M, which indicates you have received 10% of your partner’s allowance.
A List of Different UK Tax Codes
Now that you have a proper understanding of tax codes, take a look at this list of tax codes and what they mean to know about all of them.
| Tax Code | Meaning | Explanation |
| 1257L | The standard tax code | This tax code is primarily used for people who have just one job or receive a pension. The number indicates the tax-free personal allowance, and the letter ‘L’ shows the ownership of the standard allowance. |
| L | Standard Personal Allowance | Shows entitlement to the standard tax-free personal payment |
| M | Marriage Allowance | This allows you to receive 10 per cent of your partner’s money |
| N | Marriage Allowance | This shows that you have moved 10 per cent of your money to your spouse |
| T | Other factors involved | There are numerous other calculations involved in your tax code, like company benefit,s that highlight your personal allowance |
| 0T | No personal allowance or emergency code | This indicates that you have exhausted your personal allowance, or that the HMRC does not have enough information about your income. It can also mean that you have just started a new job without having enough details. |
| BR | Basic Rate tax code | People with multiple jobs will see this tax code, as it signifies that their entire income is taxed at the basic rate |
| D0 | Higher rate tax code | This is also for people who have numerous jobs or even receive multiple pensions. The income is taxed at a higher rate than others. |
| D1 | Additional rate tax code | In the same way as BR and D0, D1 shows that your income will be taxed at an additional rate. |
| NT | No tax | It shows that you will not pay any tax on the income that you are receiving |
These are the different tax codes that assist employers and pension providers in determining how much tax should be deducted from your income.
