Tax Codes

An employee's tax code is usually made up of numbers and letters.

Where the tax code is a number followed by a letter:

  • the number in the tax code is used to work out the tax due on the employee's income from their employment.
  • the letter indicates how the tax code should be adjusted following any changes announced by the Chancellor of the Exchequer. It does not affect the amount of tax the employee pays.

The tax code is made up of tax allowances. The employees deductions, if applicable, are taken away from their allowances to give their tax free income for the year.

Note the following with regard to tax codes:

  • The emergency code, which you might need to use if your employee’s tax code is unknown when they start with you, is a number followed by the suffix L. It is set each tax year and is the current tax year’s Personal Allowance without the final figure.
  • Code D1 is issued for individuals that have a subsidiary source(s) of employment income liable to tax at the additional rate of 50%. The code has been in use since 6 April 2011.
  • Code NT can be operated on either a cumulative or non-cumulative (Week 1/ Month 1) basis.
  • Prefix D codes can be operated on either a cumulative or non-cumulative (Week 1/ Month 1) basis.
  • A leading zero '0' is ONLY permitted for use with the tax code 0T.
  • The letter 'O' is NOT permitted in the tax code.
  • K codes - ‘K’ must always be shown before the numbers, e.g. K123.
  • The suffix 'V' is obsolete.

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Tax Code Suffixes

The number plus 9 is the amount of pay an employee can earn from you in a tax year before they pay any tax. For example, tax code 508L means the employee is entitled to £5,089 of tax-free pay in the tax year.

The following table gives the meaning of the tax code suffix letters:

Letter
 Meaning
L
 For an employee under 65 years of age receiving the basic Personal Allowance. Suffix L is also used for the 'emergency' code.
P
 For an employee aged 65-74 and eligible for the full Personal Allowance.
Y
 For an employee aged 75 or over and eligible for the full Personal Allowance.
T

Used if there are any items HM Revenue & Customs (HMRC) need to review in an employee's tax code or if the employee asks HMRC not to use any of the other tax code letters L P V or Y.
The ‘T’ does not mean that the employee has been given a temporary code.

K Codes

These allow for taxable benefits that exceed the tax-free allowances. There is a Regulatory limit (currently 50%) on the percentage of taxable gross pay, so that calculated tax cannot exceed this percentage. This avoids an employee having greater tax liability than gross pay. The numeric value that follows the prefix letter K plus 9 indicates the amount of pay adjustment which is added to an employee's pay for tax calculations. For example, tax code K123 means £1,239 needs to be added to the employee's taxable income to ensure they pay the right tax.

Other Codes

The following codes are mainly used where an employee has a second source of income and all their tax allowances have been included in the tax code applied to their first or main source of income:

Code
 Meaning
BR

The employee's pay will be taxed at the basic rate of tax. BR tax codes can be operated on either a cumulative or non-cumulative (Week 1 / Month 1) basis. BR is used in the following situations:

  • The employee works on a casual basis for one week or less, their earnings are above the PAYE tax threshold and they have other known employment.
  • A new employee ticks box C and/or boxes B and C on Form P46, or they do not tick any box.
  • An employee receives a taxable benefit after their date of leaving and Part 1 of the Form P45 has already been issued or sent to the Tax Office.
  • A taxable payment in respect of a deceased employee is made in a later tax year than the one in which the employee died.
0T
 There are no pay adjustment values to be applied to the employee's earnings, however, the three rates of income tax are applicable.
D0

The employee's pay will be taxed at the higher rate of tax (currently 40%). You can operate this code on either a cumulative or non-cumulative (Week 1 / Month 1) basis, as identified on forms P6 or P9, for example, forms P6 and P9 showing:

  • code D0 – indicates the code is to be operated on a cumulative basis.
  • code D0 Week 1/Month 1 – indicates the code is to be operated on a non-cumulative basis.
D1

This code is used for individuals that have a subsidiary source(s) of employment income liable to tax at the additional rate of 50%. You must deduct tax at the additional rate (currently 50%) from all pay.
NT
 This code is used where all employees are confirmed by HMRC as resident abroad and working for a UK employer. No tax will be taken from the employee's pay or pension. This code can be operated by the employer on either a cumulative or non-cumulative (Week 1 / Month 1) basis, as identified on forms P6 or P9, for example, forms P6 and P9 showing:
  • code NT – indicates the code is to be operated on a cumulative basis.
  • code NT Week 1/Month 1 – indicates the code is to be operated on a non-cumulative basis.
FT
 This code is a farmers tax used for contract workers on no more than a 12 month contract. The farmer estimates the contract worker's earnings and tax with adjustments being made using self assessment.

These codes simply tell you, the employer, how much tax to deduct.

The ‘T’ does not mean that the employee has been given a temporary code.
  'NI' is also available as a notation to use on the P11. It is NOT a tax code.
'NI' is used if you employ a student on a course in the UK who works for you solely during normal holiday times – it does NOT apply to students who work for you part-time outside normal holiday times.
No tax will be taken from the employee's pay.
As the P38(S) procedures apply, a P11 Deductions Working Sheet must be completed for National Insurance purposes.