Tax Codes Explained
Tax Codes
Tax codes are issued by HMRC to employees, with a copy being sent to the employer, for persons who are taxed under PAYE to ensure the correct amount of tax is deducted depending on a person’s individual circumstances.
A tax code normally consists of several numbers followed by a letter. For example the most common code in the year 2012/13 will be 810L. The numbers indicate the amount of your tax free allowances, which are normally increased annually by the Chancellor in the Budget. In this example you replace the letter with 9 to arrive at the tax free amount of £8,109. The letter L signifies that the code is the basic Personal Allowance. Other letters used in codes include P, Y, T, and K. An explanation of these is as follows:
P Issued to persons aged 65 to 74 who are eligible to the full Personal Allowance.
Y Issued to persons aged 75 and over who are eligible for the full Personal Allowance.
T Normally tax code 0T (Zero T) means that a persons allowances have been used up against another source of income, or reduced, and the income will be taxed depending on the level at either 20%, 40% or 50%.
K Issued where a person’s deductions (pensions, benefits etc) exceed the personal allowance.
Other Tax Codes
BR When this code is operated tax at 20% (current basic rate tax) will be deducted. Commonly used where a person has a second job or is in receipt of a pension.
D0 (D Zero). If this code is issued the income will be taxed at the higher rate currently 40%.
D1 If this code is issued the income will be taxed at the additional rate currently 50%.
NT This code is issued where no tax is to be deducted. The circumstances when this would be operated are few and far between.
Emergency Tax Codes
In certain situations an employer is obliged to operate an emergency tax code. The most common situation being where an employee starts a new employment without a form P45. Each pay day is treated as the first week/or month (depending on the payment frequency) in the year. An emergency code can be identified by WK1 or M1 appearing after the code. The most common example being 810L WK1.
