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Understanding your tax code can be tricky, the reasons for these tax codes and what they all mean can vary considerably. According to the CIPP it is estimated that 1 in 10 employees is on the wrong tax code. Do you know for sure your tax code is correct? Are you aware of the various types of tax codes? Follow our quick guide to understand more.

A tax code consists of numbers and letters. The numbers element can be multiplied by 10 and this will give you your tax-free allowance amount. The letter aspect of your tax code determines how your employer taxes your pay over your tax-free allowance.


For the tax year 2017-2018 the tax-free allowance has been set at £11,500. Your tax-free allowance may vary dependent on several factors.

Less than 1150: This may be due to additional income, employment benefits, you need to pay tax on state benefits, you underpaid tax in previous years or you have more than one job.

Greater than 1150: This may be due to using your own vehicle for business or buying fuel for a company car, claiming money towards bills as you work from home, you buy or repair small tools needed to do your jobs or you have joined your employer’s pension scheme and make regular contributions toward this.


L- This means you are under 65 and you are eligible for the standard set tax-free allowance.

BR (Basic rate)- Your tax-free allowance has been used somewhere else, this often applies to employees who have 2 or more jobs. This means that an employee will pay 20% on these earnings.

DO (Higher rate)- This tax letter applies the same principle as the BR tax rate however it is taxed at a higher rate.

D1 – This tax letter applies the same principle as above however you are taxed at an additional rate.

K- This means you are paying tax elsewhere and this amount is added to your tax payable.

NT- You do not pay tax on any of this salary.

T- Your tax code includes other calculations that you will need to work out for your tax-free allowance.

M/N- These are for married partners who share their tax-free allowance. M for the those who have received 10% of their partners tax allowance and N for those who have transferred it.

OT- This means that you have used up all your tax-free allowance for the year, meaning you will be taxed on all your earnings with no tax-free personal allowance. This is sometimes used when you change employer and is referred to as an emergency tax code.

Week 1 or Month 1 codes- This means that an individual does not have or has not provided at P45 for the work they have completed previous to their current employment, therefore meaning that their tax-free allowance is calculated on the first week or month of the tax year figures.

Still unsure about tax codes? Unsure you are processing your payroll correctly? Contact CE Back Office.

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