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Understanding PAYE Tax Codes

25 - 02 - 2022

What is a tax code?

 

A tax code is assigned to you by HMRC, and it is applied to your earnings under the Pay-As-You-Earn (PAYE) scheme. The tax code should reflect your personal allowances and allow HMRC to collect IncomeTax due for a tax year evenly over that tax year so that the take home pay is consistent over the tax year.

What does a tax code look like?

 

A tax code is usually made up of several numbers and a letter, for example: 543L or K497.

If the tax code is a number followed by a letter

Multiply the number in tax code by ten = the total amount of income you can earn in a year before paying tax.

 

For example: Tax code 1257L = 1257 X 10 = 12570 = personal allowance of tax-free income.

 

 

What does the letter represent?

 

The letter shows how the number should be adjusted following any changes to allowances announced by the Chancellor.

For example: at 06.04.21 following a budget announcement, all L codes were increased by 70. 1250L became1257L.

 

Please note that there is no increase in the personal allowance of £12,570 from 2021/2022 tax year to 2022/2023.

 

 HMRC also issue codes to reflect personal circumstances and here are the most common tax code letters and what they mean:

Letter	Reason for use
L	For those eligible for the basic Personal Allowance - 1257L for the 2022/23 tax year. It can also used for 'emergency' tax codes.
M	Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal Allowance
N	Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner
S prefixed	Your income or pension is taxed at the Scottish Rate of Income Tax
C prefixed	Your income or pension is taxed at the Welsh Rate of Income Tax
T	If there are any other items HMRC need to review in your tax code
K	When your total allowances are less than your total 'deductions'

 

 

 What if my tax code is not several numbers and a letter?

 

If your tax code has two letters but no number or is the letter 'D' followed by a zero or one, it is normally used where there are two or more sources of income and all of the allowances have been applied to the tax code and income from the main job or pension.

 

Other tax codes and what they mean:

 

Code	Reason for use
0T	Your personal allowance has been used up, or you have started a new job and do not have a form P45, or you did not give your employer the details they need to give you a tax code
BR	Is used when all your income is taxed at the basic rate - currently 20% (most commonly used for a second job or pension that is paid through PAYE)
D0	Is used when all your income is taxed at the higher rate of tax - currently 40% (most commonly used for a second job or pension that is paid through PAYE)
D1	Is used when all your income is taxed at the additional rate of tax - currently 45% (most commonly used for a second job or pension that is paid through PAYE)
NT	Is used when no tax is to be taken from your income or pension

 

 

If you have two jobs or pensions, the second income will be taxed at the basic or higher rate, because all of the allowances will have been used against the income from the main job or pension.

 

 Emergency Tax Codes?

 

W1 = Week 1 and M1 = Month 1

 

An emergency tax code can be issued, and should be temporary in one of the following circumstances:

 

1. A new job where your new tax code has not yet been issued but you need to be paid.
2. Start working for an employer after being self-employed and your tax status for the whole year is unknown.
3. You are receiving other income, for example pension or this is a second employment.

An emergency tax code means that there is no cumulative tax being calculated. All tax is calculated on your income above the personal allowance for that week or month.

 

Tax codes for 2022/2023 should be issued prior to 06.04.2022. Tax codes may be revised and reissued during the tax year.

 

If you have any concerns relating to your tax code, Foremans LLP can check your tax code for you, or if you would like to discuss any issues noted 

please contact us on:

 

 

 01244 625 500 or 01978 364 000

contactus@foremansllp.com

 

Whilst all due care and attention has been taken in the preparation of these notes no liability can be accepted for any omission or item contained therein.

 

Foremans LLP

February 2022

 

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Fixed Data

Assumptions

General                                                                                                                              

• The user is over 21 and subject to tax in the UK
• The user wishes to minimise their tax liability
• The user is subject to national insurance i.e.he/she is not over retirement age
• Only current tax rates and limits are applied
• No tax mitigation payments are made e.g. pension contributions
• Only 3 digit letter 'L' tax codes shown in the drop down list can be entered 
• The user does not have a turnover greater than £100,000 where fewer reliefs and or higher taxes may apply

Expenses

• All miles claimed as expenses are for business use using a personally owned car or van
• All other expenses claimed are wholly, necessarily and where appropriate exclusively for the benefit of the business

Foremans LLP Charges

• Foremans fees associated with Limited Company, Sole Trader or Umbrella are as per published rates
• Foremans current Service Costs are allowed for in all calculations.

Holiday Pay

• Holiday pay is accumulated week by week by Umbrella or Agency employer but paid out during the year

VAT

• Limited Company or Sole Trader will be VAT registered
• Limited Company or Sole Trader will take advantage of Flat rate VAT
• Flat rate applied includes the benefit of the additional 1% applicable to the first year of VAT registration

Limited Company Conditions

• One director / one shareholder in a Personal Service Company
• Director of Personal Service Company elects to vote for 100% dividend after salary, costs and expenses
• Director's salary is maximum salary to the primary threshold for NI
• The Limited Company is trading normally i.e it is not subject to IR35 and is not a Managed Service Company

NOTES

• The Current tax rates are taken from the Fixed Data Table
• The current Value Added Tax Rate is 20% and is applied to all invoices and expenses as appropriate
• The Director's Salary is fixed in relation to National Insurance thresholds. Higher Rate Taxpayers should consider the advantages and disadvantages of a larger annual salary or bonus
• Higher Rate Taxpayers may wish to consider the advantages and disadvantages of shared ownership of their business
• Users with a tax code other than three digits and letter "L" may telephone or email our Development Department to request a detailed calculation
• Generally the use of an Umbrella rather than an Agency payroll is only efficient if sufficient weekly expenses are allowable and claimed
• The expenses claimed under an Umbrella should not prevent the proper operation of National Minimum Wage