If you own a business, it is important to understand the different tax codes that your employees may have.

Once you know them, you will be able to deduct the right percentage of tax from their earnings.

Tax codes are issued by Her Majesty’s Revenue and Customs (HMRC) on a yearly basis between January and March. But make sure you check everyone’s codes regularly to see if anyone’s changed, as if a worker’s circumstances change the HMRC will issue a new tax code part-way through the tax year. If it has, you will need to update the employee’s payroll records.

The majority of workers will most likely have a tax code of 1257L. This is for those who hold a single job which earns them over the threshold of £12,570, and have no extra untaxed income, taxable benefits or overdue tax payments.

The value of £12,570 is the maximum salary that can be earned completely free of taxation, known as the personal allowance. As soon as a job starts to pay more than this, current tax percentages start to take effect. Moreover, the personal allowance drops by £1 for every £2 that your income exceeds £100,000.

“1257” is just the personal allowance divided by 10. This is new for the 2021/2022 tax year. Last year the value was £12,500, so most workers had a tax code of 1250L.

In some cases, an employee may have a different number other than 1257, such as 1283. This means that HMRC has given the employee some relief from paying taxes; they only need to pay income tax for any earnings above £12,830, instead of the usual £12,570.

Furthermore, if the worker has the letter K, they will have a completely different set of numbers in their tax code. K is used if the amount of tax that the worker still owes to HMRC exceeds their personal allowance, or if they are due some deductions (company benefits or state pensions for example).

Their tax code will start with K, followed by a number calculated by subtracting the deductions from £12,570, and dividing the result by -10.

Let’s say an employee receives a company car as a benefit. The car cost £30,000.

12,570 minus 30,000 is -17,430.

Divide this by -10 and you get 1743.

So the employee’s tax code will be K1743.

There are many letters other than L or K that can also appear on your employee’s tax code. Here is a brief guide on what each of them mean.

• 0T: The employee gets tax deducted from ALL of their income. In other words, they don’t get a personal allowance. This is because they haven’t given enough information to work out their actual tax code, or they have used up their personal allowance in previous years
• BR: The employee has a second job earning them between £12,570 and £37,700, so their full income for this second job will be tax-deducted at the basic rate (currently 20% in England and NI)
• D0: The employee has a second job earning them between £37,701 and £150,000, so their full income for this second job will be tax-deducted at the higher rate (currently 40% in England and NI)
• D1: The employee has a second job earning them more than £150,000, so their full income for this second job will be tax-deducted at the additional rate (currently 45% in England and NI)
• M: The employee will receive 10% of their civil partner’s personal allowance
• N: The employee will give away 10% of their personal allowance to their civil partner
• NT: The employee will not pay any tax whatsoever. This is for certain professions, or when the employee is part of a bankruptcy order
• T: The employee’s earnings need to be reviewed by the HMRC