Decode your UK tax code: a must-read guideline for UK employees

 

Are you looking to know your UK tax code to avoid overpaying tax? Then you are in the right place. Understanding your tax code in 2025 is compulsory for UK workers, as it will help you determine your tax amount, PAYE, and pension.

Tax bands

In the UK, three tax bands are available, depending on the income.

Personal allowance

Most people can earn £12570 with no tax. This personal allowance will be reduced if an individual's income exceeds £100,000. The personnel allowance threshold is revised annually and set by the budget committee. It is reviewed every year and is set by the Chancellor in the Budget. 

Basic rate band

Understanding the basic rate band helps you to manage your finances most efficiently. The earnings between £12,571 and £50,270 will be taxed at a rate of 20%.

Higher rate band

When income levels are between £50,271 and £150,000, individuals will pay tax at a higher rate of 40%. To ensure the management of taxable income, awareness of this threshold is crucial.

Additional rate band

Income greater than £150,000 will be taxed at an additional rate 45%. In this scenario, no personnel allowance will be available. Strategic planning is needed when tax obligations spike at this income level.

Tax code letters

The letters at the end of your tax code indicate the tax liability amount for each specific employment. In case of two jobs, the tax code will vary for each job.

L

It is the most common tax code. So, what’s the meaning of letter L? No, it's not the way you are looking at me; it applies to an employee who qualifies for a basic tax-free personal allowance. It is used on most of the employees' payslips. Most people are represented by tax code 1257L, 1257 represents the tax-free personal allowance of £12,570, and L is the basic tax-free allowance.

BR (Basic Rate 20%)

You are eligible to pay 20% tax on all your income. This case is usually used when you have multiple jobs or pensions and want to earn some extra cash. HMRC will tax your second job income at a rate of 100%, L tax code, on your primary income and allowance. BR tax codes also apply when someone receives income and a pension simultaneously. Pension income is taxed as it is treated as employment income.

D0

This tax code resembles BR, but earnings increased from £50,270, so the entire income will be taxed at a higher rate, i.e., 40%. It also applies to the people receiving pension income.

D1

D1 follows the same trend as D0 and BR but is taxed at an additional rate 45%. It is a scenario where you may have two jobs or be receiving a pension from your employment. Then your income goes above £125140 and will be taken off at higher tax rates, i.e.45%

K

It tells you that you have income that is not being taxed. K's tax code is more than your tax-free personal allowance.

OT

You may be wondering what the number 0 and letter L mean: you pay no tax. Well, it is not like that, and it means you are not entitled to a personal allowance. It is because your allowance has been used up. You may have started a new job, and your new employer does not have the details for your tax code information. Therefore, you must pay tax on everything you earn. If you are on this tax code, it needs to be ratified as quickly as possible so you can gather more of that sweet, sweet cash.

M

It indicates the marriage allowance of 10% received from your spouse or civil partner. In this way, you can reduce the tax liability by receiving a 10% allowance from your spouse or civil partner. It is suitable when one partner is a higher-rate taxpayer, and the other is a lower-rate taxpayer. Tax code M applied to people receiving and standing for more cash.

N

It is the opposite of the M tax code. You have transferred 10% of your allowance to your spouse or civil partner under marriage allowance rules. So, M is making more money and N is not as much, so M wants to reduce its tax liability by transferring its percentage. Lastly, it will reduce tax liability for the couple and give a win-win to both of you.

S

This tax code means tax will be deducted from your income according to Scottish tax rates.

T 

Your tax code includes calculations to work out your allowance. For example, your annual income of £100,000 will be reduced by 50% for incomes above £100,000.

R

All income or pension will be taxed at the introductory rate of 20% for example, if it's your second job.

Y

It indicates that your birth is before April 6, 1938, and you will receive a higher personal allowance.

C

C stands for Wales, not exactly; instead, it means Cymru (Wales in Welsh), indicating your main home is in Wales. So, all tax codes in Wales will start with C for example, CBR means tax liability at the introductory rate on your second employment. It instructs your employer to deduct tax from your income or pension according to Welsh tax rates.

NT

NT is the same as OT because the NT tax code means no tax is due. It is an example of when someone may be bankrupt. This tax code can also be used when someone pays overseas tax to minimise double taxation.

Conclusion

Multiple tax codes follow simple to complex rules depending on your income and source of income. These guidelines will help you understand your UK tax code more clearly and accurately. Understanding your tax code will help you determine your tax amount for pension, PAYE, and more cash in your pocket. Keeping a close eye on and regularly checking your habits will help you eliminate costly errors and pay the correct amount of tax.