HMRC tax codes explained as digit change could see you paying too much

Tax codes are used by employers or pension providers to work out how much Income Tax to take

Tax codes, used by employers and pension providers to calculate how much income tax to deduct from wages or pensions, can sometimes be a source of confusion. These codes can be found on your payslip, online or via the HMRC app, typically consisting of five or six letters and numbers.

However, mistakes can occur, leading to people being assigned the wrong tax code and consequently paying an incorrect amount of tax. Understanding your tax code and why you have been assigned it can help spot any errors before they result in under or overpayment of tax.

The most prevalent tax code is 1257L. The ‘L’ signifies that the person is entitled to the standard tax-free personal allowance – the annual earnings threshold before tax is payable – with the 1257 confirming the full £12,570 allowance.

The figures can vary if you receive certain company benefits or pay the High Income Child Benefit Charge through your wages or pension. For instance, if you receive medical insurance as a company benefit worth £1,570, this will be deducted from your personal allowance, leaving only £11,000 of your standard allowance to put towards your salary.

Consequently, your tax code would change to 1100L, indicating that you are entitled to the standard tax-free personal allowance but only up to £11,000, not the usual £12,570.

Lancs Live has highlighted that the letters in your tax code usually change based on your circumstances, and more information about tax codes can be found on the Gov.uk website.

HMRC tax codes and what they mean:

• L: You’re entitled to the standard tax-free Personal Allowance
• M: Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal Allowance
• N: Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner
• T: Your tax code includes other calculations to work out your Personal Allowance
• 0T: Your Personal Allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code
• BR: All your income from this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension)
• D0: All your income from this job or pension is taxed at the higher rate (usually used if you’ve got more than one job or pension)
• D1: All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension)
• NT: You’re not paying any tax on this income
• C: Your income or pension is taxed using the rates in Wales
• C0T: Your Personal Allowance (Wales) has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code
• CBR: All your income from this job or pension is taxed at the basic rate in Wales (usually used if you’ve got more than one job or pension)
• CD0: All your income from this job or pension is taxed at the higher rate in Wales (usually used if you’ve got more than one job or pension)
• CD1: All your income from this job or pension is taxed at the additional rate in Wales (usually used if you’ve got more than one job or pension)
• S: Your income or pension is taxed using the rates in Scotland
• S0T: Your Personal Allowance (Scotland) has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code
• SBR: All your income from this job or pension is taxed at the basic rate in Scotland (usually used if you’ve got more than one job or pension)
• SD0: All your income from this job or pension is taxed at the intermediate rate in Scotland (usually used if you’ve got more than one job or pension)
• SD1: All your income from this job or pension is taxed at the higher rate in Scotland (usually used if you’ve got more than one job or pension)
• SD2: All your income from this job or pension is taxed at the advanced rate in Scotland (usually used if you’ve got more than one job or pension)
• SD3: All your income from this job or pension is taxed at the top rate in Scotland (usually used if you’ve got more than one job or pension)

Tax codes ending in ‘W1’, ‘M1’, or ‘X’ are used to indicate temporary ’emergency’ situations. These typically include life events such as starting a new job, receiving company benefits, or beginning to receive a State Pension.

A ‘K’ at the start of a tax code usually suggests an alternative tax method is being applied. This could occur because you’re paying last year’s taxes with your current income or pension, for example.

If you think your tax code is wrong and you’ve paid too much tax as a result, you may be able to claim a tax refund to get your money back. You can double check this using HMRC’s online tax code tool.

RIFT reports that the average amount recovered through tax refunds in the UK is £3,000, according to its research based on ‘average total claims data over a four-year period’. Its advice reads: “In HMRC’s language, a tax rebate is ‘a refund on taxes when the tax liability is less than the taxes paid’.

“What it’s definitely not is a prize or a dodgy way of “cheating the system’. When you’re owed a HMRC tax refund, it’s because you’ve already paid too much tax…A lot of the time, people don’t even realise how many of their day-to-day expenses qualify for tax relief.”