Understanding Your Tax Code

Overview

Tax codes are an essential part of the UK tax system, determining how much income tax is deducted from your earnings. However, these codes can be confusing, and many people don’t fully understand what the numbers and letters in their tax code represent. This guide aims to demystify tax codes, explain how they work, and show you how to check if yours is correct.

What Is a Tax Code?

Your tax code is issued by HM Revenue and Customs (HMRC) and is used by your employer or pension provider to calculate the amount of tax that should be deducted from your pay or pension. It consists of a combination of numbers and letters, each with a specific meaning.

Breaking Down the Tax Code: 1257L Explained

The most common tax code in the UK for the 2024/2025 tax year is 1257L. If this is your tax code, it means that you have a standard Personal Allowance of £12,570.

• 1257: The number part of your tax code represents your tax-free Personal Allowance. You can earn this amount each year before paying any income tax. For most people, this figure is £12,570. HMRC removes the last digit to form the code, hence 1257.

• L: The letter in your tax code usually provides additional information about your tax situation. The "L" indicates that you are entitled to the standard tax-free Personal Allowance, and there are no special circumstances affecting your tax rate.

What 1257L Really Means

If your tax code is 1257L, it means that:

• You have no tax adjustments due to other income sources, underpayment of tax from previous years, or job benefits like a company car.

• You can earn up to £12,570 in the tax year before you start paying income tax.

• Any earnings above £12,570 will be taxed at the standard rates:

  • 20% on income up to £50,270 (basic rate)

  • 40% on income between £50,271 and £125,140 (higher rate)

  • 45% on income over £125,140 (additional rate)

Other Common Tax Codes and Their Meanings

While 1257L is the most common, there are other tax codes you might encounter:

BR: This stands for "Basic Rate." If you have this code, all of your income from this source is taxed at the basic rate (20%) without any Personal Allowance. This usually happens if you have more than one job or pension.

D0: This code means that all of your income from this source is taxed at the higher rate (40%). This is also common if you have multiple sources of income.

K*: A K code indicates that your total deductions exceed your Personal Allowance. This might happen if you owe tax from a previous year or receive taxable benefits. It essentially adds to your income, so you pay more tax.

NT: This code means "No Tax" is to be deducted from your income. This is uncommon and usually applies in very specific circumstances, like when your income is below the taxable threshold.

Marriage Allowance: How It Affects Your Tax Code

What Is Marriage Allowance?

Marriage Allowance is a tax benefit for married couples or those in a civil partnership. It allows one partner to transfer a portion of their unused Personal Allowance to the other, potentially reducing their overall tax bill by up to £252 per year (as of 2023/2024). To qualify, one partner must be a basic rate taxpayer, and the other must have an income below the Personal Allowance threshold.

How Marriage Allowance Changes Your Tax Code

For the Partner Transferring the Allowance: If you’re the partner with an income below the Personal Allowance threshold and are transferring part of your allowance, your tax code will be adjusted to reflect the reduced allowance. For example, instead of 1257L, your code might become 1157N, where the number reflects the reduced Personal Allowance (because you've transferred £1,260 to your partner), and the "N" indicates that you’ve made a transfer.

For the Partner Receiving the Allowance: If you’re the partner receiving the extra allowance, your tax code will increase to reflect the higher Personal Allowance. For example, instead of 1257L, your code might be 1383M, where the number reflects your increased Personal Allowance (because you’ve received £1,260 from your partner), and the "M" indicates that you’re the recipient of a transfer.

Why It's Important to Check Your Tax Code After Claiming Marriage Allowance

Once you apply for and receive the Marriage Allowance, your tax code should automatically adjust to reflect the new arrangement. However, it’s still important to check your tax code to ensure it’s correct, as any errors could result in you paying too much or too little tax.

Why It's Important to Check Your Tax Code

Your tax code directly affects how much tax is deducted from your earnings. If your tax code is wrong, you might pay too much or too little tax. For example, if your code is lower than it should be, you could end up overpaying tax and miss out on part of your income. Conversely, if it's higher, you might underpay and face a tax bill later.

How to Check and Correct Your Tax Code

Here’s how you can check your tax code:

• • Look at Your Payslip: Your tax code is usually shown on your payslip, P45, or P60. Make sure it matches what you expect based on your personal circumstances.

  • Use HMRC’s Tools: HMRC offers an online Personal Tax Account where you can check your tax code, see how it was calculated, and notify HMRC of any changes in your circumstances.
    📲You can also download the HMRC app which offers mobile access to your tax account.

  • Contact HMRC: If you think your tax code is incorrect, you should contact HMRC as soon as possible. They can issue a corrected tax code to your employer, and any overpaid tax will usually be refunded through your pay.

Conclusion

Understanding your tax code is crucial for ensuring that you’re paying the correct amount of tax. The standard code 1257L means you’re receiving the full Personal Allowance, and there are no adjustments to be made. However, if your circumstances change—like claiming Marriage Allowance, getting a second job, or receiving a company car—your tax code might need to be adjusted. Regularly checking your tax code and understanding what it means can help you avoid surprises at the end of the tax year.

💍Marriage Allowance can be a valuable tax benefit for couples, but it’s essential to ensure that both partners' tax codes are updated correctly to maximize the savings.