Tax codes
The numbers in an employee's tax code show how much tax-free income they get in that tax year.
You usually multiply the number in the tax code by 10 to get the total amount of income they can earn before being taxed.
For example, an employee with the tax code 1257L can earn £12,570 before being taxed. If they earn £27,000 per year, their taxable income is £14,430.
Common tax code letters:
L | For an employee entitled to the standard tax-free Personal Allowance |
M | For an employee whose spouse or civil partner has transferred some of their Personal Allowance |
N | For an employee who has transferred some of their Personal Allowance to their spouse or civil partner |
You can more information about tax codes here.
Employees should keep an eye on their tax code. They can log into their personal tax account here. If they think something is wrong, they should contact HMRC.
What can affect an employee's tax code?
- If they have more than one employment;
- If they are both employed and self-employed in different situations;
- If they share tax with a spouse via the marriage tax option;
- If they claim a pension;
- If backpay or consistent overtime exceeds their current personal allowance;
- If they run a company car.
HMRC receive 'Real Time Information' (RTI) after each payroll event. Each month HMRC can update information about employees and issue the appropriate tax codes, to make sure they are paying the correct tax amount each month.
If an employee is entitled to a tax refund, this should be taken into account during payroll calculations.