What is Tax Code?

A tax code is HMRC's way of telling your employer or pension provider how much income you can receive before tax is deducted. The code is made up of a number and a letter. The number represents your tax-free allowance -- multiply it by 10 to get the actual amount. So 1257L means £12,570 of tax-free income. The letter indicates your specific circumstances.

The most common tax code is 1257L, which reflects the standard Personal Allowance of £12,570 for 2025/26. However, your code may differ if you have untaxed income that needs collecting through PAYE, benefits in kind, or if you owe tax from a previous year. For example, if you have a company car worth £3,000 in BIK, your code might be 957L (£12,570 minus £3,000 = £9,570, shown as 957).

Common letter suffixes include: L (standard Personal Allowance), M (Marriage Allowance recipient -- extra 10% of partner's allowance), N (Marriage Allowance transferor), T (HMRC needs to review items in the code), K (deductions exceed allowances -- more tax is due), BR (all income taxed at basic rate -- often for a second job), D0 (all income taxed at higher rate), and NT (no tax to be deducted).

A K code is unusual but important. It means your deductions (benefits in kind, state pension collected through PAYE, tax owed from previous years) exceed your Personal Allowance. The number after K is the excess, which is added to your taxable pay. For example, K500 means £5,000 is added to your taxable pay. HMRC limits the tax deducted under a K code to 50% of your pay in any pay period.

HMRC issues tax codes based on information they hold about you. When you start a new job, your employer receives your code via HMRC's PAYE system. Each pay period, your employer calculates how much tax-free income you are entitled to (your annual allowance divided by the number of pay periods), deducts this from your gross pay, and applies the appropriate tax rate to the remainder.

The system operates on a cumulative basis for most codes. This means if you start a job partway through the year, the system accounts for the allowance you have already accumulated but not used. If you have been unemployed for several months, you may get a larger tax-free amount in your first payslip to account for the unused allowance, potentially resulting in a tax refund.

HMRC can change your tax code during the year if your circumstances change -- for example, if you start receiving a benefit in kind or if you notify them of additional income. You will receive a P2 coding notice explaining the change. Your employer receives the new code electronically and adjusts your pay accordingly.