What does your tax code mean and how does it effect how much tax you pay?
This article explains what each code means and how it is used to calculate your tax.
Where does my tax code come from?
Your tax code is issued by HMRC to your employer, so that the right amount of income tax (PAYE) that can be deducted each month from your salary.
Here are some examples of tax codes:
- 747P, 747V, 382Y
- BR, OT, DO, NT
Except for the last few, the majority of tax codes are a combination of numbers and letters.
The numbers are used to work out how much income should be taxed. The letter is used to determine how the income is taxed.
What the number means
The number is used to work out your tax allowance as follows:
Tax allowance = Number X 10 + 9.
For example, if you earn £20,000 per annum and your tax code is 747L then your tax allowance would be 7479. This is then deducted from your salary to determine your taxable income. For this example, the taxable income is £12,521.
Note: If your tax code is a letter ‘K’ followed by a number, it means that the total allowances in your code are less than the total deductions to be taken away from your allowances. In this case the number is added rather than deducted to determine the taxable income. For someone earning £20,000 with a tax code of K747 the taxable income would be £27,479.
For a personal calculation of your own income tax (PAYE) and National Insurance (NI) contributions use our
PAYE/NI Net Salary Tax Calculator.
What the letters mean
Tax code L
Indicates a basic personal allowance and is the most common code.
Tax codes P, V and Y
Indicate higher personal allowances for those aged over 65.
Tax code T
Indicates there are items requiring review by your Inspector of Taxes.
Tax code K
The amount of allowances is less than total deductions. An example could be if you have a company car, private medical benefit and other taxable expenses and benefits in kind which exceed the amount of the personal allowance.
Tax code BR
Stands for “Basic Rate” and indicates that all of your income is to be subjected to the basic rate of tax at the current rate. You will therefore receive no personal allowances but you will not be subjected to higher rates of tax.
A BR tax code is often issued to a consultant who sets up his own limited company, having just left a previous employment.
This is because HMRC may believe that the new company is a second source of income prior to your form P45 filtering through the system, indicating that you have left the previous employment. As soon as HMRC realise that the new limited company is your only source of income, they will usually issue an appropriate “L” tax code as above. A letter from your accountant to the Payroll Inspector for the new limited company can often speed up this process.
Tax code OT
Indicates that you have no personal allowances and all income is subject to basic and higher rates of tax.
Tax code DO
Indicates all of your income is subject to the higher rate of tax.
Tax code NT
D J Colom & Co Chartered Accountants
David Colom qualified as a Chartered Accountant in the City of London in 1981 and is the founder and principal of D J Colom & Co Chartered Accountants established in 1989.
Started specialising in serving IT contractors in 1993 and is now one of the longest standing suoppliers of accountancy services to computer contractors.
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