Tax codes explained

What a tax code is

A tax code is a short instruction to your employer, telling them how much of your pay to leave untaxed before they work out income tax. That is its whole job. It sets your tax-free pay and drives your income tax, and nothing else. It does not set your National Insurance, and it does not set your student loan.

What the numbers and letters mean

The number is your tax-free pay with the last digit removed. The common code 1257L means £12,570 of tax-free pay, the standard personal allowance, and the L means you get that standard allowance.

The letters carry the detail. M and N are the two halves of Marriage Allowance, one partner receiving it and the other giving it up. BR taxes everything at basic rate and D0 at higher rate, both usually a second job or pension. 0T means your allowance is used up, or your employer does not yet have your details. A K code is the reverse of a normal one: untaxed income is added to your pay rather than an allowance taken off it.

What changes your code

Several things move your code, and they are all about your tax-free allowance. Earning over £100,000 shrinks the allowance, and so shrinks the code. A taxable benefit such as a company car is coded in, lowering it. Tax you underpaid in an earlier year is clawed back through it. A second job or pension gets its own code, often BR or D0. Marriage Allowance shifts the code for both partners.

In every one of these the code is simply tracking a change in the tax-free allowance you are due.

What does not change it: a student loan

Here is the one that catches people out. A student loan repayment does not change your tax code. Loan repayments are a separate deduction, worked out on your earnings above your plan threshold, and handled alongside your tax rather than inside it.

Starting to repay, or clearing the loan, changes your take-home, but your code stays exactly the same. If your code changed and you assumed the loan did it, the real cause is somewhere in the list above.

Why your payslip code may differ from this tool

The code this tool shows is one it works out from a single salary across a whole year. Real payroll is cumulative and knows things this tool cannot: benefits your employer has reported, tax from an earlier year, a second job. So your payslip code can differ from the one here, and that is not an error in either.

You can enter your real code under Options on the calculator, and it will compare it with the tax-free pay it would expect and tell you roughly what any difference is worth.

When your code changes mid-year

Codes change during the year, not only in April. A pay rise into the taper, a new job, or a benefit starting or stopping all move the code, and payroll adjusts your tax from that point. If your income changes partway through the year, the pay-change mode on the calculator works the year out as two parts rather than assuming the new figure applied all along.

See your own code

Put your salary into the calculator to see the code it implies, and enter your real code under Options to compare the two. If they differ, the reasons above are the place to start.