How Tax Codes Work and What to Do If Yours Is Wrong
Tax codes are used to calculate how much income tax you must pay. It's important to check to make sure your code is correct. Having the wrong tax code could leave you paying too much or too little tax. Read on to find out more.
All full- and part-time workers and anyone receiving a private pension will have a tax code that is used to calculate how much income tax they pay.
For employees who pay tax through the pay-as-you-earn (PAYE) system, the tax code tells an employer how much tax to take off before wages are paid. If your tax code is incorrect, you may end up paying too much tax, or too little.
Here we explain everything you need to know about your tax code, including how it works, where to find it and what to do if it’s incorrect.
How your tax code works
Full- and part-time employed workers, and those receiving a private pension, will have a tax code, while those who are self-employed or people who only receive the state pension usually won’t have one.
For each income source you have — for example, from your wage and your pension — you will have a different tax code. Your code is made up of numbers and letters, such as “1257L”, which will be the most common code for the 2022/23 tax year.
The number in your tax code shows how much you can earn before you have to pay tax. The number is usually multiplied by 10, and this gives you the total amount of tax-free income. So the '1257' in the example above represents £12,570.
The letters within a tax code stand for different things. If there is an 'L', this means the person is entitled to the personal allowance. For a full list of the letters and what they mean, see the Gov.co.uk website.
If you have been given what’s called an 'emergency tax code' you will be taxed on your entire income, instead of the amount above your personal allowance. This can be the case if you change jobs and your new employer doesn’t have your tax code, or if details haven’t been passed to HMRC. You may also pay emergency tax the first time you take taxable cash out of your pension.
If you have an emergency tax code, the code is usually followed by W1, M1, or X. You’ll need to contact HMRC in order to correct this, and you should then be paid back any tax you have overpaid.
Where to find your tax code
There are a few different places you can find your tax code. These include your payslip, a P45, your online tax account (if you have one), a pension statement, or a P60. If you’re still having trouble finding it, contact HMRC and it should be able to tell you.
How to check if you have the correct tax code
If your tax code is wrong, this could mean you are paying too much tax or not enough. There are lots of free online calculators you can use to check your code.
When you enter your tax code you’ll be shown how much tax you should be paying, and you can compare this with the actual amount you have paid. If the figures don't match, contact HMRC and it should be able to change the code for you.
If you’ve been overpaying you will be due a refund; if you've underpaid you will have to make a payment to HMRC. If the latter is true, often you can arrange to pay in instalments, rather than in a lump sum. You also should have to pay back taxes only from the past four years and not before.
How to change your tax code
If HMRC changes your tax code — say, if you get a new job — it will contact you and your employer, usually by letter. On your payslip it will also show your new tax code, as well as any changes to the amount of tax you are paying if you were paying the wrong rate before.
If your circumstances have changed, such as if you start taking on income from a second job, you need to tell HMRC. You can do this online or over the phone.
It’s also worth checking your tax code every year (or at least whenever your circumstances change) to make sure it’s correct.
Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent. Read more
Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more