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.