A tax code is used by the employer to calculate the amount of income tax that must be deducted from their employees’ wages or salary. It is generally made up of numbers and letters. The number denotes the tax free allowance for the tax year. For example, a tax code of 747L means that you have a tax free allowance of £7,479 per year. This is calculated each pay period and is divided by the number of pay periods per year. So, if you are paid weekly, £7479 is divided by 52 (weeks in the year) to give a weekly rate of tax free pay of £143.83.
The letter in your tax code
“L” indicates that you are entitled to the personal tax allowance, i.e. £7,479 for the 2011/12 tax year.
“P” means that you are entitled to the higher personal tax allowance that is available to persons age 65 and over.
“Y” means that you are entitled to the higher personal tax allowance that is available to persons age 75 and over.
“V” means that, in addition to the higher personal tax allowance for persons age 65 and over, you are entitled to the age-related married couple’s allowance for couples where one of them was born before April 1935.
“T” is used in a number of different situations:
Generally it's used to indicate that the number is “temporary”, perhaps because your tax office is not yet certain of your tax affairs. It can also mean that, in addition to the higher personal tax allowance for persons age 75 and over, you are entitled to the age-related married couple’s allowance for persons age 75 and over.
Generally it's used to indicate that the number is “temporary”, perhaps because your tax office is not yet certain of your tax affairs. It can also mean that, in addition to the higher personal tax allowance for persons age 75 and over, you are entitled to the age-related married couple’s allowance for persons age 75 and over.
Other Codes
K Code
If your tax code for example is K375 this most likely means that the benefits you received in the previous tax year is more than the personal allowance for the current year and therefore the K code means you owe HMRC tax and it is to be collected via PAYE.
If you are paid weekly and your tax code is K375 then £3759 is added to the amount of tax you pay for the year. It is calculated weekly so as to spread the cost evenly throughout the year. For example, £3759 divided by 52 equals £72.29. So £72.29 is added each week to your taxable pay.
D Code
The only D code in use is D0 (zero) and this is typically given if you have two jobs and are liable to pay income tax at the higher rate of 40%
BR Code
BR or Basic Rate is another code where employees have two jobs and are liable to pay income tax at 20% on all earnings in the second job. It could also be applied if you have a pension income or HMRC have not yet set your tax code.
NT Code
This code means ‘No Tax’ and is applied by HMRC for exceptional circumstances such as students at university or college who only work during their holidays. If the student earnings for the year exceed the personal allowance of £7479 (for 2011/12) then the tax code would change to OT and further earnings will have tax deducted at the appropriate rate. NT code can also be used for some UK employees who work abroad.
OT Code
Code OT (zero T) effectively means no tax free allowance and all earnings are taxed at the appropriate tax rates depending on your earnings. This is also known as the emergency tax code and is used for new employees in certain circumstances if HMRC has not provided an official tax code.
