UK Tax Codes Explained: Understanding Your Tax Code

Payroll is a key consideration for any business owner. Whether you process payroll internally or outsource it, it must be processed regularly if you have a workforce.

Ensuring that the correct tax codes are applied to your employees is essential. It determines how much income tax each worker pays. This is why even small businesses can benefit from outsourcing payroll services to ensure accuracy and compliance.

Although tax codes are short combinations of numbers and letters, understanding how they function is helpful for every employer.

This article explains the tax code make-up, how income tax codes work, when tax codes change, a list of UK tax codes, and what they mean for your business and employees.

Understanding tax codes in the UK

A Tax code is a combination of numbers and letters used by the UK tax authority to indicate how much income tax an individual must pay based on their earnings and personal circumstances.

Even in the simplest cases, understanding tax can be challenging due to self-assessment, operational costs, or the wide range of UK tax codes, each with a significant impact on take-home pay.

This explanation provides a straightforward guide to help you understand your tax code and what it means.

What is a tax code England?

A tax code is a set of numbers and letters used by HMRC to indicate how much income tax should be deducted from an employee’s salary or pension. Even a small mistake in a tax code can significantly affect an employee’s take-home pay. Employers use these codes within the PAYE (Pay As You Earn) system to calculate deductions accurately.

HMRC communicates the correct tax code to your company or pension provider, and it is the employee’s responsibility to ensure it is correct. Using the wrong tax code can lead to employees paying too much or too little tax, resulting in either refunds or unexpected tax bills.

How does a tax code work?      

In the UK, most taxpayers are entitled to the standard tax free personal allowance. The allowance is £12,570 for the 2025–26 tax year. Employees without other income streams do not pay income tax on earnings up to this allowance. Many tax codes England start from this standard figure.

Income tax is deducted under the PAYE (Pay As You Earn) system. It spreads the cost evenly across each pay period in the tax year (6 April to 5 April the following year). This ensures consistent deductions from salaries or pensions.

The primary tax code is subject to modification.  For example, tax codes can be adjusted to include additional allowances, such as for marriage, blind persons, or other reliefs. These raise the tax-free amount, reducing the total tax deducted. Conversely, underpayments from previous years or taxable company benefits like a company car can reduce the allowance, increasing the deductions.

The tax-free sum is converted into a tax code by removing the last digit and adding a letter. Letters instruct employers or pension providers on how to apply the tax code. For example, “L” codes are updated each year by HMRC to reflect changes in the standard personal allowance.

Several letters and numbers can appear in a tax code, each with a specific meaning. It is also possible for a person to have multiple tax codes if they hold more than one job or receive a pension. This ensures that deductions are calculated accurately across all income sources, including state pension payments or other taxable benefits.

What does your tax code mean?

Tax-free compensation: A person’s tax-free personal allowance is based on a range of different elements. There is the standard allowance, but also extra allowances based on personal circumstances, such as civil partnerships sharing/ marriage allowances, registered blind, working from home allowances etc.

Also payments to pension or charitable donations can be deducted from gross pay before tax is calculated, although this does not affect the tax code.

Unpaid wages and taxes: A person may owe tax from a previous tax year, which will affect the tax code issued in the current year, this could be due to taxable benefits such as a company vehicle, health insurance, or housing, that was not reported to HMRC until the end of the tax year.

Once these values are determined, any overdue taxes or employment benefits will reduce the tax-free amount. A final digit will be taken out of the final number, which constitutes the numerical portion of any tax code.

What does your tax code include?

A tax code reflects both the standard allowance and any extra allowances employees are entitled to, such as marriage allowance, registered blind allowance, or working-from-home allowances.

If employees have unpaid taxes or benefits like a company car or other company benefits, these are factored into the tax code and reduce the personal allowance. For instance, any overdue tax or pension contributions will affect the numerical portion of the tax code

How are tax codes structured?

Income tax codes, UK are structured using a combination of letters and numbers. The numbers represent a person's Personal Allowance, and the letters reflect a person's situation and how it affects their Personal Allowance.

The numbers part meaning

The following are the components of a tax code’s numbers:

• The amount of an individual’s tax-free annual allowance (determined by HMRC).
• The total of any taxed job-related perks in addition to the total income they have earned but haven’t yet paid taxes on.
• Subtracting their tax-free allowance from the earnings that have not been taxed.
• The deletion of the final digit.

The letters part meaning

Each person’s specific circumstances determine the alphabet in a tax code. When the income tax code for your worker ends with “W1” or “M1,” it is referred to as an emergency tax code.

• Emergency tax codes like W1 and M1 can be found towards the end of a worker’s tax code, for instance, “588L W1” or “588L M1.” Be sure only to consider the amount of money your worker has received during the most recent payment period when calculating their tax.
• When an individual’s allowance is less than the deductions owing for business perks, pension schemes, or tax payable from prior years, the letter K is included within their tax code.

Common UK tax codes

How do I find my Tax Code?

Your tax code will appear on your payslip, the coding notice from HMRC, P60, or P45. You can also check it using HMRC’s online Check Your Income Tax tool. This allows you to view your code for the current, previous, or upcoming tax year. Your tax code may also be provided via email from HMRC.

If you don’t yet have an account, you will be prompted to join Government Gateway.

After logging in, you may also view if the tax laws have changed and the tax amount you're most likely to incur. 

Your paycheck or an email from HMRC may also contain your tax code. Read about your national insurance category.

Why do Tax Codes Change?

Tax codes may be updated by HMRC if:

• You start a second job or pension

• Your employer reports new taxable benefits

• Government benefits are taxed

• You apply for marriage allowance or tax relief

• You switch jobs and receive an emergency code

What to do if you have the wrong Tax Code?

You may evaluate if your tax code is probable to be correct given your income and circumstances now that you know what it entails. You will need to check with HMRC if your tax code does not look quite right.

A change in your income or revenue that might have impacted your tax code can also be reported to HMRC.

How to solve tax code problems

Tax laws can create challenges for both employers and employees. Common issues include the application of emergency tax codes or changes in an employee’s circumstances, such as receiving a state pension, taxable company benefits, or additional income. Employees should notify HMRC promptly of any changes that could affect their tax code. This can easily be done online through the HMRC portal.

As an employer, it is crucial to use only the tax codes provided by HMRC. Applying an incorrect code can lead to payroll errors, unexpected tax deductions, or disputes. You must also be prepared to justify tax codes during any inquiry from HMRC or in response to employee questions. Read this article to learn what steps to take if you missed your staging date and why understanding this is crucial for payroll compliance and avoiding penalties.

Many businesses choose to work with a trusted payroll provider to manage tax codes and payroll compliance. Using an experienced service ensures accurate deductions, correct handling of employer or pension contributions, and proper implementation of all British tax codes, reducing the risk of errors.

Conclusion

Properly managing tax code issues protects both employees and your business from costly mistakes. Ensuring accurate tax deductions, keeping up with changes, and understanding how tax codes work is essential for payroll compliance.

If handling these responsibilities feels complex, outsourcing your payroll to experts like Dhpayroll can save time, reduce errors, and ensure your employees are paid correctly every pay period.  Contact Dhpayroll today to streamline your payroll and stay fully compliant with UK tax regulations.