Every employee needs a tax code and this is what you use to work out how much tax your employee pays.
Tax codes are usually made up of a combination of numbers and letters and will look like this: 1257L
This is the tax code currently used for most people born after 5 April 1938 with one job.
Numbers: these refer to how much income an employee can have before they pay tax. The numbers 1257 refer to the Personal Allowance, which is currently £12570. But the numbers may differ from this example, depending on your personal tax position.
Letters: Usually one letter (unless you live in Scotland or Wales); it refers to an employee’s situation and how it affects his or her tax-free Personal Allowance. ‘L’ shows that an employee is entitled to a basic tax-free Personal Allowance.
An employee’s payslips, P45, end of year P60 or Pay Coding Notice letter will show the tax code.
You need to tell HM Revenue and Customs (HMRC) when you take on a new employee. If you don’t know what you’re employee’s tax code as they have not provided a P45, then you use the statements on the Starter Checklist to determine which starting tax code to use. HMRC will then send you an updated code if a change of code is required once you have submitted your new starter details via RTI for their first pay day.
Tax code letters
Not everyone has the letter L in their tax code. Other letters refer to an individual’s situation and how it affects their tax. Here are some examples:
• K in a code could mean that tax is being paid through wages that are owed from a previous year. Or your employee is getting the State Pension or benefits from work such as a company car.
• M means a transfer of 10% of a partner’s Personal Allowance as been received.
• N means 10% of a Personal Allowance has been transferred to a partner.
• W1 (week 1) or M1 (month 1) are emergency tax codes. This means that tax is based only on what is paid in the current pay period – either week or month – and not the whole year. These codes are known as ‘non-cumulative’.
Emergency tax codes are usually updated automatically after you get your employer’s P45. An employee will always start a new tax year with a normal tax code, not an emergency one.
There are more tax code letters… You can read about them here.
When a tax codes changes
If an employee’s circumstances change either you or an employee will need to tell HMRC and it will issue a new tax code. The most common reasons for a tax code change are if an employee starts or stops getting:
- Taxable benefits from the job, such as a company car
- Taxable expenses from work
- Income that isn’t being taxed, such as rental income
- Taxable State benefits such as State Pension.
A tax code will also change if an employee needs to pay tax from a previous year.
HMRC will send out a Pay Coding Notice if the code changes. This will tell an employee what the code is and how it’s worked out.
What to do if a tax code is wrong
It’s not an employer’s responsibility to check an employee’s Tax Code is correct. If an employee thinks their tax code is wrong, he or she will need to contact HMRC.
They can call HMRC on 0300 200 3300 or fill out the form online.