With a new UK tax year coming in, a financial spring clean may be at the top of your to-do list.
Several key household bills are getting more expensive in April 2023, at the same time as the minimum wage, state pension and benefits are rising. Your ISA allowance will also reset, making this time of year vital for savings and investments.
Changes will also be brought in for some major taxes. Income tax thresholds will be frozen over the coming 12 months - an effective tax increase - while capital gains tax and corporation tax are going up too. Ahead of these changes, making sense of your tax code will help you understand how much of your salary is going to the Treasury - knowledge that will help you budget effectively.
Deductions happen before you get your wage and, if the numbers and letters are wrong in your tax code, you could be paying too much, or even too little tax. If your tax code is wrong, you can claim back up to four years’ worth of overpayments. HMRC is likely to be in touch with you if you’ve not been paying enough, something that could mean a hefty bill is on the way.
Tax codes might look confusing to begin with but are actually simple to understand. They are used by employers and pension providers to work out how much of your income is tax free, how much tax you should pay and if there are any other circumstances to consider.
What does the tax code mean?
The code tells your employer or pension provider how much tax you are going to pay each month until the following April. The numbers in your code indicate how much of your annual income is tax free and the letter reflects your current employment status.
The tax code 1257L is most common for people who have one job or pension. It changed from 1250L from the 2020/21 tax year after a 0.5% increase to the income tax personal allowance - from £12,500 to £12,570.
The Personal Allowance is the amount of taxable income a person can earn without needing to pay tax on it, with tax rates kicking in on any money earned above this threshold. The current code is unlikely to change given the personal allowance aspect of income tax has not changed this year. HMRC will have already been in touch with you if your t
What are the tax code letters and what do they mean?
Letters in your tax code refer to your situation and how it affects your Personal Allowance.
- L - This entitles you to the standard tax-free Personal Allowance
- M - This code shows you’ve received a transfer of 10% 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
What do the tax code letters mean in Scotland?
- S - This shows your income or pension is taxed using the rates in Scotland
- S0T - This code means your Personal Allowance has been used up, or your employer does not have the details they need to give you a tax code in Scotland
- SBR - This means all your income from this job or pension is taxed at the basic rate in Scotland
- SD0 - This code shows all your income from this job or pension is taxed at the intermediate rate in Scotland
- SD1 - All of your income from this job or pension is taxed at the higher rate in Scotland
- SD2 - All of your income from this job or pension is taxed at the top rate in Scotland
What do the tax code letters mean in Wales?
- C - This means your income or pension is taxed using the rates in Wales
- C0T - This code means your Personal Allowance has been used up, or your employer does not have the details they need to give you a tax code in Wales
- CBR - This shows all your income from this job or pension is taxed at the basic rate in Wales
- CD0 - All of your income from this job or pension is taxed at the higher rate in Wales
- CD1 - All of your income from this job or pension is taxed at the additional rate in Wales
What are emergency tax codes?
Emergency tax codes can be spotted with the addition of W1, M1 or X following the standard 1257L code. They are temporary and will only be on your payslip if you have started a new job, moved to a full time job after being self-employed, are getting company benefits or a state pension.
What are K codes?
People with an income that is not being taxed another way and is worth more than your tax free allowance will have a tax code beginning with a K. This can happen if you are paying tax owed from a previous year or if you are getting benefits - be it state or company - which you need to pay tax on.
What are income tax 2023/24 bands?
During his Autumn Statement 2022, Chancellor of the Exchequer Jeremy Hunt announced he would freeze most income tax bands, while also extending the top-end 45p rate to more people. In England, Wales and Northern Ireland, the top rate will apply to those earning £125,140 or more - down from the previous £150,000 a year limit. These earners will also have no personal allowance, with the allowance decreasing by £1 for every £2 you earn over £100,000.
Meanwhile, in Scotland, the changes will be marginally different. As well as lowering the top rate threshold, the tax rate in that band will climb from 46% to 47%. The higher rate will also increase from 41% to 42%.
Tax bands (excluding Scotland)
- Personal Allowance - Up to £12,570 - 0%
- Basic rate - £12,571 to £50,270 - 20%
- Higher rate - £50,271 to £125,140 - 40%
- Additional rate - over £125,140 - 45%
Tax bands in Scotland
- Personal Allowance - Up to £12,570 - 0%
- Starter rate - £12,571 to £14,732 - 19%
- Basic rate - £14,733 to £25,688 - 20%
- Intermediate rate - £25,297 to £43,662 - 21%
- Higher rate - £43,663 to £125,140 - 42%
- Top rate - over £125,140 - 47%