A guide to UK tax codes

InTouch Accounting

Introduction

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:

  • 747L
  • 747P, 747V, 382Y
  • 384T
  • K384
  • 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

   
David Colom

David Colom

Principal

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. Read Full Profile...

View all our experts

   

Indicates that no tax is to be deducted on your income – the tax code we would all like to have!

Further resources

HMRC: Understanding your tax code

PAYE/NI Net Salary Tax Calculator


Alliance Accountants

Updated: Monday, December 26, 2011

© 2014 All rights reserved. Reproduction in whole or in part without permission is prohibited. Please see our copyright notice. If you want to use any content you have seen on this site then please request our media pack and ask for details of our Content Licencing Service.

Inni Accounts


Readers Comments...


  
Bookmark and Share
  
     
  

Latest Site Updates

Using social media to win contracts Using social media to win contracts

Contractors can increase the chances of being found by recruiters & to find contracts by using social media, says Paul Clutton of Hays Senior Finance.

ContractorCalculator: Contracting news in brief – 21/Nov/2014 ContractorCalculator: Contracting news in brief – 21/Nov/2014

News this week covers: New contracting tsar at NFD; skills shortages; Scottish contracts; shale gas; record IT worker numbers; and HMRC’s performance.

National Freelancers Day 2014: contracting tsar hints at plans to benefit contractors National Freelancers Day 2014: contracting tsar hints at plans to benefit contractors

National Freelancers Day 2014 was the “best yet” & featured hints about plans being shaped before the election by new contracting tsar, David Morris.

National Freelancers Day 2014 is being celebrated today - #NFD2014 National Freelancers Day 2014 is being celebrated today - #NFD2014

Contractors get to celebrate contracting as the Association of Independent Professionals and the Self Employed hosts another National Freelancers Day.


  
  

Twitter

Follow Us On Twitter


  
     

  
  

Contractor solutions

Contractors Handbook IR35 Test Clever Accounts IR35 Report - 15 Years Accountants Checklist Alliance Accountants
  
  

Contractor solutions

Contractor Angels

More than just an Umbrella. Retain up to 90% of your earnings.

Parker Cavendish

Complete accountancy packages for contractors

Need an accountant?

Comprehensive service for £59 per month. Call now for a FREE consultation.

Clever Accounts

Complete contractor accounting service. 24/7 online access. £69 pm!

InTouch Accounting

Perfect mix of technology & personal service for only £92 per month.

Contractor Accountant

Free consultation, incorporation and IR35 reviews. Find out more…

Parasol

The UK’s largest employment organisation - 0% risk, 100% compliance

NA Parker Cavendish D J Colom Accountants Bedouin Group Contractor Financials NewsNow
  
Caprica Accountants Parker Cavendish Contractor Insurance Life Insurance

  

The UK's leading contractor site. Independently audited traffic (ABC) – 124,827 monthly unique visitors.