Paying tax is part of life. However, it can be complex to understand how they work. Regardless of your job role, you’ll be paying taxes.
Chances are, you’ve been paying taxes since your first job – but have you ever considered why people have different tax codes? To learn more about the different tax codes, continue reading.
Why Do We Pay Tax?
Many individuals remain unaware of the reasons behind paying taxes, but we’re here to break it down.
There are various taxes in the UK, two of which are income tax and national insurance (which is essentially another form of income tax) – both of which are typically deducted from your wages and sent to HMRC. It’s important that we pay our taxes on time. Predominantly, the taxes we pay go towards public services, including:
- Education
- Healthcare
- Emergency services
- Road projects
Between 2024 and 2025, we expect central government departments to spend £430.2 billion on the day-to-day running costs of public services. However, our taxes don’t just get spent on public services – they’re also spent on universal credit, state pensions, and social security, too.
Tax Codes Explained
What are tax codes? Tax codes are made up of a combination of letters and numbers that represent the tax-free part of someone’s income (an employee). Tax codes are assigned by tax authorities, helping employers calculate how much tax should be paid under the PAYE system.
Although we all have tax codes, many of us don’t know the reasoning behind them – but it’s important to know why we have them.
Essentially, tax codes show how much tax-free income you should receive per tax year. Whatever you earn outside of your tax-free personal allowance will be taxed.
Whether you have one job, multiple jobs, or a pension, you’ll be required to pay income tax. If you have more than one job, how much income tax you pay will be combined overall, as HMRC calculates your personal allowance based on whichever one is your main source of income. You’ll also have more than one tax code if you work a second job.
What Do Tax Codes Mean?
In the UK, there are numerous tax codes, with the most common tax code for tax year 2024–2025 being 1257L. This tax code is used for those who have one job or a pension. Tax codes are worked out based on your tax-free personal allowance and other income that tax hasn’t been paid on.
While working out your tax code, HMRC also takes into account any company benefits that you receive. Within your tax code, a letter will be present. The letter in your tax code represents your current situation. Let’s find out what some letters stand for:
- L – entitled to the standard personal allowance (tax-free)
- M – received 10% of your husband or wife’s personal allowance
- N – transferred 10% of your personal allowance to your partner
- T – includes other calculations to help work out your personal allowance
- 0T – no personal allowance left when starting a new job
- BR – tax code BR means all your income from one job or pension is being taxed at a basic rate (this applies to those with multiple jobs or pensions)
- D0 – all your income from one job or pension is being taxed at a higher rate (this applies to those with multiple jobs or pensions)
- D1 – income or pension is being taxed at an additional rate
- NT – no tax is being paid on this income
- S – income or pension is taxed using rates in Scotland
Some tax codes in the UK have the letter ‘K’ at the beginning. Typically, a ‘K’ tax code means you have an income that hasn’t been taxed and is ultimately worth more than whatever your tax-free allowance is.
If you don’t have these letters or numbers within your tax code, and instead they have W1, M1, or X at the end, then that means you have an emergency tax code. Emergency tax codes are issued when HMRC doesn’t have any information on your income details.
Checking Your Tax Code
Ensuring that you have the correct tax code is key. If you need to check your tax codes, you can do so by looking on:
- Payslips from your employer or pension provider
- Your tax account
- The HMRC online app
- Tax code notice letters
You should take the time to check whether you have the right income tax code, otherwise, you could end up paying more tax than necessary.
Have You Been Given the Wrong Tax Code?
In many cases, HMRC will issue an automated update regarding your tax code once your income changes. They get the key information about your income from your employer. However, HMRC can get the wrong information, which leads to you being given an incorrect tax code.
To prevent being given the wrong tax code, ensure that HMRC is provided with the right information about how much you earn. If you still think that your tax code is wrong, we advise using the income tax online service to update details. The online service lets you:
- Add missing information about your income
- Add company benefits that you receive
- Update the estimated income that you receive
Personal Tax at LJS Accounting Services
Your tax code is important for numerous reasons. The 31st of October is the deadline for self-assessments – where HMRC collects any payments with your tax code.
At LJS Accounting Services, we offer a wide range of services, including personal tax. We can help you complete your self-assessment tax return while offering support, guidance, and advice.
To find out more about our tax services, we encourage you to get in touch today. We look forward to hearing from you shortly.
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.
