For most people, the letters ‘HMRC’ fill them with dread and anxiety. This is largely because when it comes to the list of tax codes and what they mean, most of us are confused. While embarking on your professional journey and transitioning between jobs can be lots of fun and great for your career, the different tax codes and how they work may cause you considerable confusion. But don’t worry this isn’t only affecting you, as anyone earning an income in the UK needs to understand the significance of tax codes.
Therefore, we’ve put together this guide that will list the tax codes and what they mean, explaining how they work, what it means for you and how to keep on top of your tax code. Read on to find out more.
Who needs a tax code?
While tax codes may sound exclusive to high earners or seasoned professionals they are relevant to anyone earning an income in the UK. So whether you’re a recent graduate stepping into your first job or an experienced professional switching between roles then you must understand your tax codes so that accurate deductions are being made from your earnings.
This includes anyone who is working on a self-employed basis where a tax preparation service may be required. Remember that not knowing what your tax code is or whether you’re on the right one can cost you considerably.
What should your tax code be?
So first of all, it is important to realise that everyone’s tax code is unique so you can’t compare yourself to others when trying to work out your tax code. Your tax code is given to you by HM Revenue and Customs (HMRC) which determines your income tax obligations – this means how much money will be deducted from your wages.
Your tax code considers various factors such as employment circumstances, personal allowances and any additional income sources or reliefs you are entitled to.
What is BR tax code?
While there is a full list of tax codes and they all mean something different, the BR tax code is very common. This code means you’ll be taxed on all of your income at the current basic rate of income tax at 20%. If you’re on this code for the entire year and your total income is less than £50,270 for 23/24, it’s likely that you will be in a tax refund position at the end of the tax year.
Emergency tax codes
The use of an emergency tax code may seem alarming, especially when starting a new job but it happens when HMRC don’t have enough information about your financial situation.
Emergency tax codes are used to ensure you pay an amount of tax until your employer receives the necessary details from HMRC. This may mean that you end up paying more tax at first, but this will be adjusted if necessary when HMRC gets all the information they need from your new employer.
An emergency tax code can be identified with an X suffix.
A list of common tax codes and what they mean
One of the reasons why tax codes can be confusing is because there are so many of them. Tax codes come in various forms as each have different implications based on an individual’s circumstances. Some tax codes are more common than others and therefore you may already be familiar with some.
Let’s take a look at a list of tax codes and what they mean.
1257L
This is the most common tax code and is the standard tax code for individuals entitled to the basic tax-free personal allowance, set at £12,570 for the 24/25 tax year.
D0
This code is designated for individuals paying tax at the higher rate, currently set at 40% for earnings between £50,271 and £150,000.
D1
The D1 tax code is allocated to individuals with earnings surpassing £150,000, attracting the additional rate of 45%.
K Code
A K code means that a pay adjustment has been added, rather than subtracted from the amount of taxable pay. This means there will be an increase to the amount of taxable pay compared to the actual pay.
M Suffix
An M suffix means there is an increase to the personal allowance as part of the Marriage Allowance Legislation.
N Suffix
An N Suffix means there is a decrease to the personal allowance as part of the Marriage Allowance Legislation.
T Suffix
This code appears if HMRC is reviewing any items of a tax code.
How Are Tax Codes Worked Out?
Now that you know more about tax codes and what they mean you may have a better understanding of which apply to you. The tax codes are worked out as HMRC calculates tax codes based on information from your P45 (from your previous employer) or P60 (at the end of the tax year). However, other changes in your circumstances, such as marital status, parenthood, or extra income, can influence your tax code.
What to Do If Your Tax Code Is Wrong
If you suspect something is wrong with your tax code and think that you’re paying too much or too little tax then you must take action as soon as possible. You should get in touch with HMRC online, by phone, or by post to report any discrepancies or changes in circumstances that may impact your tax code. HMRC will review the information and issue a revised tax code if necessary.
Even if you feel you are on the right tax code but don’t fully understand it then you can also get in touch with them for more information on your tax code and what it means.
Tax codes don’t have to be a cryptic puzzle that you’ll never understand. Instead, by doing some research into what your tax code is, and what it means, and by keeping an eye on your tax code in case it changes, you’ll have all the information you need to effectively manage your tax affairs. For more information or assistance with your accounting, get in touch today.
