How Tax Codes Work in the UK

Published on October 18, 2023

Personal AllowanceTax Code

Dividends Tax If you've ever received a payslip, you've probably noticed a series of letters and numbers known as your "tax code." But what do they mean, and how do they impact your income? This guide breaks down the components of tax codes, helping you make sense of this important part of your financial life.

Deciphering the Numbers

Your tax code consists of numbers that reveal your tax-free income for a given tax year. Here's how to interpret them:

  • Personal Allowance: The core of your tax code represents your tax-free Personal Allowance, which is the amount of income you can earn in a year without paying tax.

  • Adjustments: In addition to your Personal Allowance, adjustments may be made based on your individual circumstances, such as untaxed interest, part-time earnings, or the value of company benefits (e.g., a company car).

Understanding the Letters

Letters in your tax code indicate your situation and how it affects your Personal Allowance. Here's what the letters mean:

LetterMeaning
LYou're entitled to the standard tax-free Personal Allowance
MMarriage Allowance: You've received a transfer of 10% of your partner's Personal Allowance
NMarriage Allowance: You've transferred 10% of your Personal Allowance to your partner
TYour tax code includes other calculations to work out your Personal Allowance
0TYour Personal Allowance has been used up or you've started a new job and your employer doesn't have the details needed for a tax code
BRAll your income from this job or pension is taxed at the basic rate (usually used if you have more than one job or pension)
D0All your income from this job or pension is taxed at the higher rate (usually used if you have more than one job or pension)
D1All your income from this job or pension is taxed at the additional rate (usually used if you have more than one job or pension)
NTYou're not paying any tax on this income
SYour income or pension is taxed using the rates in Scotland
S0TYour Personal Allowance (Scotland) has been used up or you've started a new job without the necessary tax code details
SBRAll your income from this job or pension is taxed at the basic rate in Scotland (usually used if you have more than one job or pension)
SD0All your income from this job or pension is taxed at the intermediate rate in Scotland (usually used if you have more than one job or pension)
SD1All your income from this job or pension is taxed at the higher rate in Scotland (usually used if you have more than one job or pension)
SD2All your income from this job or pension is taxed at the top rate in Scotland (usually used if you have more than one job or pension)
CYour income or pension is taxed using the rates in Wales
C0TYour Personal Allowance (Wales) has been used up or you've started a new job without the necessary tax code details
CBRAll your income from this job or pension is taxed at the basic rate in Wales (usually used if you have more than one job or pension)
CD0All your income from this job or pension is taxed at the higher rate in Wales (usually used if you have more than one job or pension)
CD1All your income from this job or pension is taxed at the additional rate in Wales (usually used if you have more than one job or pension)

Special Tax Codes

If your tax code includes 'W1', 'M1', or 'X' at the end, it's an emergency tax code:

  • W1: This code is temporary and often assigned when HMRC doesn't have your updated income details promptly. For example, if you start a new job, work for an employer after being self-employed, or begin receiving state benefits or company benefits.

  • M1: Similar to 'W1', 'M1' is an emergency tax code typically used after significant life changes or new employment.

  • X: The 'X' code may be applied if you have untaxed income that exceeds your tax-free allowance, often due to tax owed from a prior year or certain benefits.

Emergency tax codes are provisional and will be updated once HMRC receives your correct income details. If you've underpaid or overpaid taxes due to changes in your circumstances, your tax code will be adjusted accordingly.

Why Your Tax Code Might Change

Your tax code can change for several reasons, including:

  • Earning income from an additional job or pension.
  • Informing your employer about benefits received from your job.
  • Receiving taxable state benefits.
  • Claiming Marriage Allowance.
  • Claiming expenses eligible for tax relief.

If you change jobs or experience significant life events, your tax code may be temporarily set to an emergency code until your details are updated with HMRC.

To calculate your Income tax, you can use the following tool Take Home Pay Calculator .

To compare differences between two salaries, you can use the following tool Compare two salaries .

To calculate your marginal rate tax , you can use the following tool Marginal tax rates.