Do you know how to help your employees with queries about their tax code? Understanding your employee’s tax code can be confusing for both the employee and the employer, and your employees will have questions from time to time about what it means.
Although it is the employees own responsibility to check if their tax code is correct, it can be useful to understand what each tax code means, what different codes could be applied to your employees pay and how this will affect them, and their net pay each month.
What is a tax code?
Every employee being paid through a UK payroll will have a tax code. This code is usually comprised of numbers and letters and represents the amount of personal allowances your employee is entitled to before tax is deducted from their pay.
The employees tax code is issued to both the employer and employee by the HMRC, and the employee should be advised by the HMRC when there is a change. If your employee disagrees with the tax code they have been issued, they can call the HMRC employees’ helpline to discuss their circumstances.
What do the numbers mean?
Employees’ personal allowance
The numbers in a tax code represent how much tax-free income is available to the employee for the current tax year. This is known as your employees’ personal allowance and is shared equally over 12 months. The default personal allowance for each tax year is advised by the HMRC and in 2022/23 this is £12570. You will see this on your employee’s payslip as tax code 1257L.
Changing Tax Codes
If your employee’s tax code is not 1257L (tax free pay £12570), it could mean that their personal allowance has been changed. This change would be calculated based on their personal circumstances. As an example, if the employer pays £1,500 for a benefit in kind such as private medical, the employees’ tax-free allowance is reduced by this amount. This means that your employee’s new code would be 1107L (tax free pay £11,070). The HMRC will adjust your employees tax code when required and the new code should be applied to your employee’s payslip as soon as it is received.
What do the letters mean?
The letter in your employee’s tax code represents their personal circumstances. This could be a suffix or pre-fix depending on which letter has been allocated to your employee and can affect your employees tax calculation.
| L Suffix | This suffix is used for employees who are entitled to the default tax free personal allowance (For 2022/23 this is £12570) |
| M Suffix | This is used for an employee whose spouse had transferred some of their personal allowance to them. |
| N Suffix | This is used for an employee who has transferred some of their personal allowance to their spouse. |
| S Suffix | The S Suffix is used for an employee who lives in Scotland |
| T Suffix | This suffix is used to show an employee’s personal Allowance has other calculations included. |
| K Suffix | The K prefix indicates that your employee might has other income that exceeds their tax-free allowance and as such their total deductions are higher than the personal allowance. When your employee is issued with a K code you cannot deduct more than half of the employee’s pre-tax pay. |
What other tax codes might I see?
There are a few other tax codes that you may see on an employee’s payslip that do not fall into the above categories:
| 0T | The 0T code is used if your employee has used all of their personal Allowance, if they are a new joiner who has not provided a P45 from previous employment or you don’t have any information to ensure you can apply the correct code. |
| D0 | An employee with a D0 tax code will be taxed at the higher rate, which is 40% on all the earnings. |
| D1 | An employee with a D1 tax code will be taxed at the rate of 45% on all the earnings |
| NT | The NT tax code (which means No Tax) would be issued to your employee if there is no tax to be deducted. |
| M1/W1 | If you see a M1 or W1 at the end of your employee’s tax code it means that their tax will only be calculated based on what they are paid in the current pay period, ant not the tax year. |
If you need any advice, please get in touch with the Menzies payroll team. Our team of experts will be able to help manage your payrolls and provide advice and guidance when you need it.