What does my tax code mean?

An employee's tax code is used by employers to calculate the amount of income tax that must be withheld, or deducted, from the employee's wage or salary.

The tax code is the mechanism by which "pay as you earn" (PAYE) is operated in the UK, making it possible for most employees to have paid exactly the right amount of income tax by the end of each tax year. As a result, most employees in the UK do not have to complete an income tax return.

Tax codes that end with a letter

These are called "suffix" codes. Codes 503L, 728P, 1003V, 742Y and 235T are all examples of suffix codes. For the purpose of calculating income tax, the suffix letter is not relevant - only the number is significant. The letter is used at the end of each tax year for updating the number part of the tax code for the following tax year. (See What does the letter at the end of my tax code mean? )

The number part of the tax code indicates to your employer how much is allowed against your earnings before calculating income tax. For example, "503" means that your "tax-free pay" for the tax year is £5,039; "728" means £7,289, "1003" means £10,039, etc.

The Government sets the personal tax allowance - available to every employee - in advance of the start of each tax year. The personal tax allowance for the 2006/07 tax year is £5,035. The tax code that represents this allowance is 503L.

You can see, therefore, that the number part of your tax code indicates to your employer how much is allowed against your earnings before calculating income tax. Although '503' is derived from the personal tax allowance of £5,035, in practice it gives you "tax-free pay" for the tax year of £5,039. Similarly, tax code '728' means £7,289 tax free pay; '1003' means £10,039 tax free pay, etc.

If the number part of your suffix code is lower than 503, it may be that you owe tax, perhaps because you received some taxable benefits from your employer in the previous tax year. You will pay the extra tax during the current tax year.

If the number part of your suffix code in higher than 503, this is probably because you are also entitled to another tax allowance, such as the married couple's allowance (only available if you are are a couple and one of you was born before April 1935), or the blind person's allowance.

HM Revenue & Customs (HMRC) sends you a P2 Coding Notice before the start of a new tax year to explain how your tax code for the new tax year has been determined.

You are not given all of your "tax-free pay" for the year in one go. Rather, it is allowed against your wage or salary in equal instalments throughout the tax year. For example,

If you are paid weekly and your tax code is 503L, you are allowed £96.90 of tax-free pay each week throughout the tax year (i.e. £5,039 � 52).

Example: Your weekly earnings are £260. You pay tax on £163.10 (i.e. £260 - £96.90).

If you are paid monthly and your tax code is 247L, you are allowed £206.58 of tax-free pay each month throughout the tax year (i.e. £2,479 � 12).

Example: Your monthly salary is £1650. You pay tax on £1443.42 (i.e. £1650 - £206.58).

Tax codes that start with a letter

K code
If your tax code is a number that is preceded by "K", e.g. K375, you have a "K code". This type of code tells your employer how much extra must be applied to your earnings before calculating income tax.

If you have a K code, this is probably because the taxable value of the benefits you received in the previous tax year is more than the personal allowance for the current year. You owe more tax on your benefits than is available from your personal allowance. Therefore, the K code is effectively a negative tax code.

Only the number part of the code is significant. For example, "375" means that your "additional taxable pay" for the tax year is £3,759.

You do not pay all of the tax on your "additional taxable pay" for the year in one go. Rather, it is applied to your wage or salary in equal instalments throughout the tax year. For example,

If you are paid weekly and your tax code is K375, an extra £72.29 is applied to your wages each week throughout the tax year (i.e. £3,759 � 52).

Example: Your weekly earnings are £450. You pay tax on £522.29 (i.e. £450 + £72.29).

If you are paid monthly and your tax code is K650, an extra 542.42 is applied to your salary each month throughout the tax year (i.e. £6,509 � 12).

Example: Your monthly salary is £2,300. You pay tax on £2,842.42 (i.e. £2,300 + £542.42).

D code
The only "D code" currently in use is D0 (i.e. D zero). It is applied by HMRC to employees who are liable to pay income tax at the higher rate, i.e. 40%. You may be given this tax code if you have two jobs - in one of the jobs you have a suffix code so that you receive your "tax-free pay"; in the other you must pay tax at 40% on all of the earnings.

If you have this code, your employer is required to deduct tax at 40% from all of your earnings. You do not have any "tax-free pay". In some circumstances, a code NI is used instead of NT.

Example: Your monthly salary is £2,000. Your employer deducts £800 (i.e. 40% of £2,000).

Other special tax codes

BR
This code is an abbreviation of "Basic Rate". It is applied by HMRC to employees who are liable to pay income tax at the basic rate, i.e. 22%. You may be given this tax code if you have two jobs - in one of the jobs you have a suffix code so that you receive your "tax-free pay"; in the other you must pay tax at 22% on all of the earnings. If you have two pensions, the state pension and an occupational pension, this code may be used to deduct tax from your occupational pension.

Your employer is also allowed to allocate this code for new employees in certain circumstances if HMRC has not yet provided an official tax code.

If you have this code, your employer is required to deduct tax at 22% from all of your earnings. You do not have any "tax-free pay".

Example: Your weekly earnings are £300. Your employer deducts £66 (i.e. 22% of £300).

NT
This code is an abbreviation of "No Tax". It is applied by HMRC in exceptional circumstances to employees who are not required to pay tax on their earnings. Examples are students at university or college who only work during their holidays, and some UK employees who work abroad.

Example: Your weekly earnings are £200. Your employer does not deduct any tax.

0T
Code 0T (i.e. zero T) is, strictly speaking, a standard suffix code. If you have this tax code, the numerical value, 0, means that your tax free pay is nil. As a result, you would be taxed on all of your earnings at the appropriate tax rates, i.e. 10%, 22% and 40%, depending on your earnings.

You may be given this tax code if you are a student and you are working during your holidays from college or university. If you meet all the necessary conditions, your employer uses tax code NT initially so that you do not pay any tax on your earnings. However, as soon as your earnings in the tax year reach £5,035, your employer would change your tax code to 0T. You have already had all of your tax-free pay, so all of your earnings now will be taxed at the appropriate rate.

Emergency tax code
The emergency tax code is set by the Government each year. For the 2006/07 tax year, the emergency code is 503L. Your employer is allowed to allocate this code for new employees in certain circumstances if HMRC has not yet provided an official tax code. It ensures that they receive the full personal alllowance for the year.

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