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 letter 'O' has not been permitted in the tax code since the tax year 2004/2005.
  • A leading '0' (zero) is ONLY permitted for use with the tax code 0T or the tax code D0.
  • K codes - K must always be shown before the numbers, e.g. K123.

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Tax Code Suffixes

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.
P
For an employee aged 65-74 receiving the lower personal age allowance.
V
For an employee aged 65-74 receiving the lower personal age allowance plus the full married couple's allowance for those born before 6 April 1935 and aged under 75, where HM Revenue & Customs estimate that the employee is liable at the basic rate of tax.
Y
For an employee aged 75 or over receiving the higher age-related personal allowance.
T

Used if there are any items HM Revenue & Customs need to review in an employee's tax code or if the employee asks HM Revenue & Customs 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. Any remaining amount is printed on the calculation routine. The numeric value that follows the prefix letter K indicates the amount of pay adjustment which is added to an employee's pay for tax calculations.

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
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 taxable earnings will be taxed at the higher rate of tax (currently 40%). This code is always applied non-cumulatively on the employee's earnings.
BR

The employee's pay will be taxed at the basic rate of tax.
BR tax codes can be operated cumulatively or non-cumulatively. 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.
FT
This code is a farmers tax used for contract workers on no more than a 12 month contract. The farmer estimates the contract workers earnings and tax with adjustments being made via self assessment.
NT
NT is used where all employees are confirmed by HM Revenue & Customs as resident abroad and working for a UK employer. No tax will be taken from the employee's pay or pension. This code is usually applied non-cumulatively on the employee's earnings.

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.