List Of Tax Codes And What They Mean For Your Business

Tax codes can be tricky. After all, there are around 20 of them in the UK alone.

If you're sitting there wondering what all these tax codes mean for your business, don't worry; we're here to help!

In this complete guide, we're giving you the lowdown on all of the different tax codes in the UK. We'll:

• Explain what each one means
• Help you understand how they impact your business
• Talk about how to reduce risks associated with tax codes

By the end, you'll have a better idea of how to manage your finances and stay on the right side of the taxman. Let's get started.

What do tax codes mean for businesses in the UK?

Tax codes are like personalised tags for each employee that tell you how much income tax they should pay. They’re a mix of letters and numbers that HMRC uses to figure out how much of an employee’s pay is tax-free and how much gets taxed.

For businesses, getting tax codes right is crucial. It ensures that payroll calculations are accurate, which keeps everyone satisfied. Each tax code is personalised based on the employee's earnings, benefits, and other income sources. This helps businesses manage payroll effectively and stay compliant with HMRC rules, including the VAT threshold. 

What are the tax code letters?

Tax code letters represent different situations an employee might be in. For example, L means you get the standard tax-free allowance, while T signifies a special circumstance that needs extra calculation. Each letter helps tailor the tax code to fit the employee's specific needs.

What is a number tax code?

A number tax code means you get a specific amount of tax-free income each year. The number usually represents how much you can earn before paying tax. For example, 1250L means you can earn £12,500 tax-free.

Where can you find a taxation code? 

You can find your taxation code on your payslip or P60 form. It's also on any correspondence from HMRC about your taxes. If you're not sure, check your personal tax account online or give HMRC a ring—they're there to help sort it out.

Explaining different tax codes 

It's super important to know what these mean so that you know yourself, and your brilliant employees, have the correct tax code on their pay slips. After all, you want to know how much tax you should be paying, right? And you definitely don't want to be paying more than you should.

Without further ado let’s get into it. Here's the full list of tax codes and what they mean for your business.

L tax code

We're starting with L. That's because it's the most common tax code used.

What does the L tax code mean? Well, it's for employees who are entitled to the standard tax free personal allowance. This will likely be the case for most (if not all) of the employees you're going to be dealing with.

You've probably seen the code 1257L written on either your own, or your team's payslip. It essentially means the £12,570 tax free allowance that most people get.

M tax code 

Looking for a way to reduce your tax bill? One method often mentioned in jest is taking a trip down the aisle, but let's not seriously consider that as a tax strategy!

The M tax code is for those lucky enough to benefit from the Marriage Allowance. If your spouse or civil partner doesn't use all of their Personal Allowance, they can transfer 10% of it to you. This can lower your tax bill and make a noticeable difference in your finances.

So, if you're eligible, the M tax code is a straightforward way to keep a bit more money in your pocket. It's one of those little perks of being hitched that can really add up.

N tax code

The N tax code actually goes hand-in-hand with the above mentioned M tax code.

The N tax code is for someone who has given 10% of their Personal Allowance to their spouse or civil partner. This is part of the Marriage Allowance scheme. By doing this, you help lower your partner’s tax bill, making it easier to save money together.

If your partner earns more and could use the extra allowance, choosing the N tax code can be a smart move. It’s a simple way to make the most of your combined finances.

Tax code BR

The BR tax code (which stands for Basic Rate FYI) means that all your income from a job or pension is taxed at the basic rate. That currently stands at 20%.

This tax code is usually used when you have more than one job or more than one pension provider. Instead of splitting your Personal Allowance across your different income sources, the BR code just applies a flat 20% tax to one of them.

While this keeps things simple, it also means you might be overpaying on taxes because none of your Personal Allowance is being used. So, if you see the BR tax code on your payslip, it’s worth checking with HMRC to make sure you’re not paying more tax than needed.

OT tax code 

The OT tax code can sometimes catch people off guard. So pay close attention here!

This tax code is used when you don’t get any Personal Allowance, and all your income is taxed at the appropriate rates for each income band. You'll probably see it if you've reached the limit for the Personal Allowance or when HMRC doesn't have enough info about your income.

So, if you've got multiple jobs, are starting a new job without a P45, or if you've used up your personal allowance, look out for this one.

D0 tax code

Now, for all of you lucky high earners out there, let’s talk about the D0 tax code.

The D0 tax code means that all your income from a job or pension is taxed at the higher rate of 40% (which you'll have to pay if you're earning £50,271 or more). It comes into play when you have lots of sources of income, like juggling several jobs or pensions, and your total earnings push you into that higher tax bracket.

While the D0 tax code keeps things straightforward by applying the higher rate, it also means you’ll get no Personal Allowance for this income. 

D1 tax code

If you’re juggling two jobs or working while collecting your pension, the D1 tax code kicks in when you’re earning over £125,140. That means all your additional income gets hit with the 45% rate, keeping things consistent for high earners.

So, if D1 shows up on your pay stub, you’re in the top earnings league, my friend.

NT tax code

NT stands for "No Tax," which means exactly what it says: you're not paying any income tax on your earnings. This code is typically used in specific situations like bankruptcy proceedings, where income might be exempt from taxation to help manage financial challenges.

Additionally, NT can apply to non-UK residents who are already paying taxes in another country. This ensures they don’t face double taxation, which means being taxed on the same income by both the UK and their home country.

So, if you find NT on your tax details, it’s a relief – no tax burden to worry about in those circumstances.

S tax code

S stands for Scotland – think of it as the Scottish version of the C tax code used elsewhere in the UK. But here's the twist. Scotland likes to do things its own way, with more tax bands than its neighbors down south.

In Scotland, you might stumble upon SD2, which means facing a hefty 48% tax rate on earnings over £125,140. Och aye, that's a bit steep!

So, if you spot an S on your tax paperwork and you're up north, dinnae fash yersel! It’s just Scotland's way of making sure taxes fit the highlands and lowlands alike.

T tax code

The T tax code is used for individuals who have specific circumstances that require adjustments to their Personal Allowance calculations. It's like saying, "Hey, there's something unique here that needs a tailored approach."

Whether it's additional income sources, specific deductions, or unique tax situations, the T code ensures that your tax calculation takes everything into account.

If you see T on your tax documents, it means HMRC is using this code to handle your tax affairs with a bit of personalized attention. It's all about making sure your tax situation fits like a glove.

K tax code

Finally on our list of UK tax codes and what they mean is K.

K stands for "Kerching!"

Well, not exactly, but it does mean you’re earning income that isn’t being taxed in the usual way. This could be because you’re already paying back taxes owed from a previous year, so HMRC can’t tax that income again using the usual method.

You might also spot K at the beginning of your tax code if you're receiving benefits – whether from a private source or the government – that are taxable. It’s HMRC’s way of making sure they get their slice of those benefits.

So, if you come across a K in your tax code, it’s like a reminder to HMRC: "Hey, we’ve got special circumstances here." It’s all about guaranteeing fair taxation while accounting for unique financial situations.

Factors to consider as an employer to work out what income tax code your employees should be on

Figuring out the right income tax code for your employees is key to keeping things running smoothly. It’s not just about crunching numbers. You need to understand each employee’s situation (we're talking everything from their earnings and tax allowances, to any special circumstances they may have). By getting this right, you’ll nail accurate payroll and also keeping your team happy and compliant.

Let's explore the key considerations that employers should keep in mind when assigning income tax codes to their employees.

Check their P60

Be sure to check their P60 form. It's like a summary of their earnings and taxes for the year. This helps you see how much income tax they've paid and if their tax code matches up with their tax-free income.

Transparent employment situation

Knowing the ins and outs of how each staff-member is employed is key to sorting out their tax code. Whether they're full-time, part-time, or have a temp contract can really shake up how much tax they owe. Full-timers have their tax split evenly over the year, but part-timers or temps might see changes in their tax code as their paychecks vary.

Pension and other benefits 

Think about any sweet extras your employees get, like pensions, bonuses, or perks from the company. These can change how much of their pay is up for grabs by the taxman. Contributions to a pension, for instance, might get them a break on how much they're taxed. Understanding these perks helps you stay on top of tax rules and lets your team make the most of their paycheck.

Different sources of income

If your folks are pulling in cash from different gigs – like a side hustle or freelancing – it can change the amount they have to pay in tax. Every income stream adds up and can push them into a different tax bracket. Making sure you count every pound and penny they earn helps you nail down the right tax deductions. This keeps them square with the taxman and avoids any surprises come end-of-year.

Personal details

Keeping their personal info current is key for figuring out their tax-free allowances and making sure their taxes are spot on. Stuff like their marital status, where they live, and any tax credits they might score can change how much tax they owe. Updating their deets ensures you're using the right tax code and helps them keep more of their paycheck.

Use the HMRC income tax tool 

HMRC's got this handy tool online that helps you figure out exactly what tax code each person needs. It crunches the numbers based on their income sources, benefits, and personal deets. Using this tool makes payroll easy and it's a surefire way to get their tax deductions spot-on.

How to reduce the risk of a wrong tax code

When it comes to ensuring you have the right tax code for your employees, here’s how you can minimise the risk of errors:

1. Stay updated: Make sure you’ve got the latest info on your team – stuff like addresses and marital status. Changes can affect how much tax they owe and which tax code applies.
2. Use reliable payroll and accounting software: Investing in robust software like Epos Now's POS system and POS integrations such as Workforce.com can completely streamline payroll processes. These tools integrate tax calculations, making sure that you're being accurate and complying with the rules and regulations.
3. Check payroll records regularly: Take a peek at payroll records now and then to catch any mistakes early. This way, you can fix things before they cause any problems.
4. Train your payroll team: Make sure your payroll crew knows their stuff. Training them on tax rules and updates helps them apply the right tax codes correctly.

By following these steps and using solid POS software like Epos Now’s complete solution, you’ll reduce the chances of messing up tax codes.