Let's Talk About Tax Codes On Your Payslip

Let's Talk About Tax Codes On Your Payslip

If you have employees in the UK, you've probably spotted some mysterious codes on their payslips. It can be a bit of a head-scratcher to figure out how these codes affect the tax deductions from their salary, right? So, let's demystify these common codes together, one by one.

L – This is the standard tax code letter, indicating the individual receives a tax-free personal allowance. If they receive the full allowance, which is £12,570 this year, the payslip should display the code 1257L.

K - If you see a K code, it likely indicates that your employee owes tax from a previous year, or might be receiving company benefits. If the sum owed exceeds the tax-free personal allowance, they will be paying additional tax to compensate.

M – M stands for Married! This symbolizes that a spouse or civil partner has transferred some of their allowance to your employee. As a result, a larger portion of their salary is applied at a tax-free rate. So there you go, marriage is worth it after all!

BR – BR stands for Basic Rate. HMRC often applies this rate if your employee has another job where their tax-free allowance is already in use. This means that the salary you pay them will be entirely taxed at the Basic Rate of 20%.

Emergency tax codes – Now, there’s a few you might see here, W1, M1 or X – these are all emergency codes and at some point, you are bound to have an employee that is assigned these after transitioning to you from another employer. These codes indicate that HM Revenue and Customs (HMRC) haven't received or processed all the necessary information. If they are assigned one of these codes, there's a chance they could be taxed incorrectly. However, don't worry - these codes are temporary. Once HMRC updates the employee’s information, they will be assigned a permanent code. Any issues with under or over taxation will be resolved the following month.

If an employee comes to you with a question about a tax code and you're unsure what it means or why it's changed, the best course of action is to advise them to call HMRC. HMRC has access to their personal tax records. However, be aware that wait times to speak with an HMRC advisor can be lengthy so for any general inquiries, feel free to get in touch with us on +44 (0) 3330 067 123

OTG tailors our approach to your company's payroll needs. We know every business is different, so apart from general payroll management, we also have industry-specific specialists on board. These whizzes know the ins and outs of specific industry requirements and can guide you on how to manage your payroll to get the most bang for your buck, no matter where your business is located.