Understanding Tax Codes
HMRC are responsible for assigning and issuing tax codes to employees, changes can happen at any time through a P6 coding notice. Why an employee is assigned a specific tax code depends entirely on their personal circumstances and cannot necessarily be understood by simply looking at their tax code. However the meaning and resulting treatment of a tax code can be explained.
For more detailed information on setting an employee's tax code using the API please see page Setting the Employee Tax Code.
Tax codes ending with L
Tax codes that end with L indicate you have an entitlement to your tax-free personal allowance, the preceding numbers indicate how much. For example in the 2017/18 tax year the most common tax code is 1150L, the 1150 equates to £11,500 of tax-free personal allowance, this number can be less or more depending on an employee's personal circumstances.
Other common letters and their meanings
There are a number of other letters used within tax codes to denote special meaning, these are used in the tax calculation engine to ensure the correct tax is paid.
| Letter | Explanation |
|---|---|
| M | Employee has received a transfer of 10% of their partner’s Personal Allowance under the Marriage Allowance. |
| N | Employee has transferred 10% of their Personal Allowance to their partner under the Marriage Allowance. |
| S | Indicates the employee should be taxed using the Scotish Rate of Income Tax (SRIT). |
| T | The employee's tax code includes other calculations to work out their Personal Allowance, for example it has been reduced because the estimated annual income is more than £100,000 |
| 0T | The employee's personal allowance has been used or they've started a new job and the details of their tax code have not been transferred. |
| BR | The employee is taxed at Basic Rate on all their income, including pensions. |
| D0 | The employee is taxed at Higher Rate on all their income, including pensions. |
| D1 | The employee is taxed at Additional Higher Rate on all their income, including pensions. |
| NT | No tax; the employee pays no tax on their income. |
| K | The employee's income that isn’t being taxed another way and it is worth more than their tax-free allowance. This can happen if they are paying tax owed from a previous year or they are receiving other taxable benefits. |
Tax code uplift
At the start of each tax year HMRC issue an incremental value, known as an 'uplift' to tax codes containing L, M or N. The PayRun.io API automatically applies this increment to all employees appropriateley through the pre-calculation rule TaxCodeUpliftRule.