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There are several tax codes which you or your employees could be assigned. Understanding the reasons for the tax codes and what they all mean can be tricky. Do you know for sure your employee’s tax codes are correct? Follow our quick guide to understand more…

What?
  • 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 various things about the employee and gives details to the employer about how to tax you over your tax-free allowance.
Numbers

For the tax year 2019-2020 the tax-free allowance has been set at £12,500 (note this is due to change in April 2020). Your tax-free allowance may vary dependent on several factors.

Less than 1250: 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 1250: 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.

Letters

BR (Basic rate)- this tax letter means that your tax-free allowance has been used somewhere else. This often applies to employees who have 2 or more jobs. Meaning 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 to the same principle as above however you are charged 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 in their previous 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?