A financial spring clean might be at the top of your to-do list as the new UK tax year approaches.
In April 2023, a number of significant monthly expenses will increase along with raises in the minimum wage, state pension, and benefits. This time of year is critical for savings and investing since your ISA allowance will also reset.
There will also be changes made to a few significant taxes. Over the next 12 months, income tax thresholds will be frozen, thereby increasing taxes, while capital gains tax and corporate tax will also increase. Making sense of your tax code will help you budget wisely by letting you know how much of your income is going to the Treasury before these changes.
But what is a tax code and why yours might have changed?
What is a tax code?
Your employer or pension provider uses your tax code to determine how much income tax to deduct from your pay or pension. They will be instructed on which code to use by HM Revenue and Customs (HMRC).
A tax code is simply a series of numbers and letters, for example 1257L, S1257L, C1257L, BR, and K497.
These hieroglyphics are used by your employer(s) or pension providers to determine how much tax should be withheld from your pay or pension before it is transferred into your bank account if you are a full- or part-time employee or receive a private pension.
This is known as the pay-as-you-earn (PAYE) system, though not everyone is taxed in this way.
You won't have a tax code if you're fully self-employed, unemployed, or you only receive the state pension.
What are the tax code letters for England?
- L — This entitles you to the standard tax-free Personal Allowance
- M — This code shows you’ve received a transfer of 10 per cent of your partner’s Personal Allowance
- N — This code means you’ve transferred some of your Personal Allowance to your partner
- T — This signals that other calculations are included in working out your Personal Allowance
- 0T — This means your Personal Allowance has been used up or that your new employer doesn’t have the details they need to give you a tax code
- BR — This code means all the income from this job or pension is taxed at the basic rate, usually used if you have a second job or pension
- D0 — All of your income from this job or pension is taxed at the higher rate (for workers with more than one job)
- D1 — All of your income from this job or pension is taxed at the additional rate (for workers with more than one job)
- NT — This code shows you are not paying any tax on this income
W1, M1, or X can be added after the typical 1257L code to indicate an emergency tax code. They are transient and only appear on your payslip if you have started a new work, transitioned from self-employment to a full-time job, or are receiving corporate benefits or a state pension.
How do I find out my tax code?
You can find out your tax code by checking your tax code for the current year online — you’ll need to sign in to or create a personal tax account.
Alternatively, you can have a look on the HMRC app, or a recent payslip.
If you sign in to check your tax code online, you can also find your tax code for a previous tax year.
Why has my tax code changed?
HMRC may update your tax code if you start to get income from an additional job or pension, your employer tells HMRC you have started or stopped getting benefits from your job, you get taxable state benefits, you claim Marriage Allowance or you claim expenses that you get tax relief on.
You may also be put on an emergency tax code if you change jobs.
