Do You Know How To Decipher Your Tax Code?

Understanding your PAYE (Pay As You Earn) tax code is a crucial aspect of managing your finances, yet it is something many people overlook or find unnecessarily complicated.

While they may appear as a cryptic combination of numbers and letters, ensuring your code is correct can help avoid any nasty surprises after the end of the tax year or when HMRC reconciles their PAYE records. We have previously unravelled the secrets of tax codes, revealing their purpose and breaking down their complexities. Tax codes play a vital role in determining how much of your income is taxed, so understanding them is key to managing your finances effectively.

In this guide, we will take a comprehensive look at PAYE tax codes, what they mean, how they are constructed, and why it’s important to ensure that yours is accurate.

What does my tax code mean?

We always advise that additional and higher-rate taxpayers, who are making large pension contributions, take care with their tax code. Why? Because it is sometimes automatically assumed that a similar contribution will be made in the following year, and as a result, your tax code may change. 

Your tax code is issued by HMRC before the start of each tax year and can be changed during the year if your circumstances change.  Once in use, it can also be found on payslips issued by your employer, or if you have a Government Gateway account, you can access a copy of your tax code notice, which provides a breakdown of how HMRC have worked out your tax code.

What are the different tax codes?

Letters	What they mean
L	You are entitled to some or all of the standard tax-free Personal Allowance (£12,570)
K	You have income that is not being taxed another way (e.g. benefits or other untaxed income), and the value of it is more than your available tax-free allowance
M	You have received a transfer of 10% of your partner’s Personal Allowance
N	You have transferred 10% of your Personal Allowance to your partner
T	Includes other calculations to work out your Personal Allowance
0T	Your Personal Allowance has been used up, or you’ve started a new job, and your employer does not have the details they need to give you a tax code
NT	You are not paying any tax on this income
S	Your income or pension is taxed using the rates in Scotland
C	Your income or pension is taxed using the rates in Wales

The following codes are usually used if you’ve got more than one job or pension:

Letters	What they mean
BR	All your income from this job or pension is being taxed at the basic rate  of tax
D0	All your income from this job or pension is being taxed at the higher rate of tax
D1	All your income from this job or pension is being taxed at the additional rate  of tax

Emergency tax codes will end in W1, M1 or X and may be a result of commencing a new job, working for an employer after being self-employed or receiving company benefits or State Pension.

This code will be temporary and will be updated once HMRC receive the correct details, or after the end of the tax year.  However, if you have, or have had, an emergency tax code, you can expect to pay more tax on your employment income for the period in which the code was applied, as it is highly likely that insufficient tax was able to be deducted from your employment or pension during the year since the code was applied.

If you overpay tax during the year, any additional tax paid will be refunded by HMRC once the correct tax liability for the period has been established after the end of the tax year.

Why is it important to be on the correct tax code?

Ensuring your code is correct during the year is crucial in order to avoid facing an unforeseen liability further down the line. The correct income tax will always come out in the wash, be it through submission of a self-assessment tax return or HMRC’s reconciliation of their records. If you have underpaid tax through your employer because of an incorrect code, this can lead to a nasty surprise for some.

For example, if an individual’s salary is expected to be £125,140 or higher in the 2025/26 tax year and they are on a 1257L code, they will incorrectly be receiving £12,570 of income tax-free through their payslip. The tax due on this income will ultimately need to be paid to HMRC, and the additional tax could amount to up to £6,034 (Scotland) or £5,657 (Rest of the UK). Paying this throughout the year via your salary can help you budget your finances more accurately and avoid potential cashflow issues later down the line.

Who is responsible for checking my tax code is correct?

Most UK employees receive a notice of tax coding from the HM Revenue & Customs at least once a year, usually before the start of the tax year.

Your employer is not responsible for ensuring that your coding notice is correct, and they will not check it for accuracy. Your employer is only responsible for ensuring that the coding notified to them by HMRC is used to deduct tax from your earnings before they are paid to you.

The responsibility for ensuring that the coding notice is correct lies with you. It is quite common for incorrect or out-of-date coding notices to be issued as the information contained within them is based on events from previous years or information known to HMRC, and if this occurs your employer may be deducting too much tax from you.

How can AAB help?

If you have any questions regarding your coding notice for the 2025/26 Tax Year or how to rectify an issue you have already spotted in your code, we are here to help. Please do not hesitate to get in contact with Sarah Sargent, a member of our Private Client team or your usual AAB Contact.