Understanding your tax code

Your tax code is one of the most important pieces of information you receive from HMRC each tax year, yet many employees and pensioners don’t fully understand what it means or how it affects their take-home pay. Getting it wrong can cost you money—either through underpaying tax and facing a bill later, or overpaying and missing out on a refund. In this post, we’ll break down how tax codes work, what the numbers and letters mean, and what to do if you think yours is incorrect.

What is a tax code and why does it matter?

Your tax code tells your employer or pension provider how much of your income is tax-free, and at what rate any remaining income should be taxed. HMRC calculates your code based on your personal allowance, any benefits you receive, and other factors affecting your tax liability.

For the 2024/25 tax year, the standard Personal Allowance is £12,570. This means you can earn up to this amount without paying income tax. However, if you have multiple jobs, receive a pension, or have other sources of income, your code adjusts accordingly.

Your tax code appears on your payslip and on documentation from HMRC. It typically consists of a number followed by a letter—for example, 1257L or 1100T. Understanding this code helps you verify that the right amount of tax is being deducted.

Decoding the numbers and letters

The number in your tax code represents your tax-free allowance divided by 10. So a code of 1257L means you have a tax-free allowance of £12,570 (1257 × 10). If your code were 1100L, you’d have a tax-free allowance of £11,000.

The letter at the end matters just as much. Here are the most common ones:

L – You’re entitled to the standard Personal Allowance and have no complications. This is the most common code.

M – Your partner has transferred their unused allowance to you. This means your allowance is higher.

N – You’re transferring your unused allowance to your partner.

T – HMRC needs more information before they can finalise your code, or you have unusual circumstances. If you see this, it’s worth checking your HMRC account.

0T – You have no Personal Allowance. This typically applies if you have substantial income or are a high earner.

BR – All your income from this source is taxed at the basic rate (20%). Often used when you have multiple jobs.

D0 – All income is taxed at the higher rate (40%).

D1 – All income is taxed at the additional rate (45%).

If your letter is anything other than L, M, or N, it’s sensible to review your circumstances with an accountant.

Common reasons your tax code might be wrong

Tax codes can change for several reasons. You might receive a new code if you change jobs, start receiving a pension, claim Marriage Allowance, or if HMrc receives information about additional income.

Sometimes HMRC gets it wrong. If you’ve started a new job and your previous employer hasn’t notified HMRC that you’ve left, you might still be receiving a code based on your full year’s allowance rather than a month’s worth. This is called an “emergency” or “cumulative” code and should be corrected once your records are updated.

If you work more than one job, make sure only your main employment gets your full Personal Allowance. Your second job should typically have a code of BR or similar, to ensure you’re not double-counting your allowance.

What to do if something looks wrong

The first step is to check your HMRC online account via Gov.uk, where you can view your tax code and the reasons HMRC has assigned it. Compare this to your payslip—they should match.

If something doesn’t look right, contact HMRC directly through your online account or by phone. Have your National Insurance number ready. If the issue is with your employer, ask your payroll department to check their records.

It’s worth reviewing your tax code annually, especially if your circumstances change. This simple check can save you hundreds of pounds.

For tailored advice, contact Severn Accounting — we’re here to help.