UK Tax Codes Explained for 2024/25

Tax codes are essential for determining how much income tax is deducted from your pay or pension. They tell employers how much tax-free income you’re entitled to, based on your personal circumstances. In this guide, we’ll cover the most common tax codes, how personal allowance ties into them, and what to do if your tax code is wrong.

What is a Tax Code?

A tax code is made up of numbers and letters, such as 1257L. The numbers tell your employer how much tax-free income you can have each year, while the letters provide additional information about your tax status. The most common code for 2024/25 is 1257L, which means you’re entitled to the full personal allowance of £12,570.

Here’s how it works: multiply the number by 10 to get your tax-free allowance. If your code is 1257L, your first £12,570 of earnings are not taxed, with the rest taxed at the appropriate rate (20%, 40%, or 45%, depending on your income level).

Other Common UK Tax Codes

In addition to 1257L, there are several other important tax codes that apply in different situations:

• BR: All income is taxed at 20%. This code is often used for second jobs or pensions.
• D0: All income is taxed at 40%, typically for higher-rate taxpayers with multiple sources of income.
• D1: All income is taxed at 45%, applied to additional rate taxpayers.
• K: This code is used when untaxed income (e.g., benefits like a company car) exceeds your personal allowance, meaning your employer deducts more tax.
• 0T: No personal allowance is applied, and all income is taxed at the applicable rate. This is often used when HMRC doesn’t have enough information about your employment or tax situation.

Regional Variations: Scotland and Wales

While tax rules are the same in England, Wales, and Northern Ireland, Scotland has its own income tax rates. This means Scottish taxpayers receive codes like S1257L to ensure the correct rates are applied. Scottish rates start at 19% (starter rate) and rise to 21% (intermediate rate) and beyond, making the tax system more progressive compared to the rest of the UK.

Although Wales uses the same tax bands as England and Northern Ireland, Welsh taxpayers are identified by a “C” prefix in their tax code, such as C1257L.

How Personal Allowance Affects Your Tax Code

The personal allowance for 2024/25 is £12,570, which is reflected in the 1257L tax code. This means that your first £12,570 of earnings are not taxed. However, if you receive taxable benefits or have additional income that reduces your personal allowance, your tax code will be adjusted to reflect this.

For example, if you have £3,000 worth of benefits-in-kind, like a company car, your tax code may reduce to 957L, indicating a lower tax-free income of £9,570. This ensures that the value of the benefits is taxed correctly.

Automatic Assignment of Tax Codes

HMRC automatically assigns tax codes based on the information they receive from employers and pension providers. When you start a new job, your employer submits details to HMRC, and you’re assigned a code, usually based on your current situation. However, if they lack full information, a temporary tax code (like BR or 0T) may be used until HMRC updates it.

If you notice that your tax code seems wrong or outdated, you can contact HMRC to request a correction. For example, if you’ve changed jobs or started receiving new benefits, you may need to update your tax code to avoid overpaying or underpaying tax. You can check and manage your tax code through HMRC’s online portal.

Why Tax Codes Matter: Examples

1. Standard Employee (1257L): James has a salary of £28,000 and the tax code 1257L. The first £12,570 of his income is tax-free, and the rest (£15,430) is taxed at the basic rate of 20%.
2. Second Job (BR): Rebecca works two jobs. Her second job uses the BR tax code, meaning she is taxed at 20% on all her income from this job, as her personal allowance is applied to her main employment.
3. K Codes for Benefits: If you have untaxed benefits that exceed your personal allowance, such as £3,000 in benefits from a company car, HMRC might issue a K100 tax code. This ensures tax is deducted to cover those benefits.

How to Correct a Tax Code

It’s important to keep an eye on your tax code, especially if your circumstances change. If your code is incorrect, you could end up overpaying or underpaying tax. Common situations that could require a tax code change include:

• Starting a new job where your previous employment details haven’t been processed yet.
• Receiving taxable benefits like medical insurance or a company car.
• Earning income from a second job or pension, which might need a separate tax code like BR or D0.

If your tax code needs adjusting, you can contact HMRC directly, either online or by phone, to update your information.

The Role of Tax Codes Throughout the Year

Tax codes are not static—they can change throughout the year as your financial situation evolves. Whether you get a pay rise, switch jobs, or start receiving a pension, your tax code can be updated to reflect these changes. However, most of the time, tax codes are applied automatically, and you won’t need to think much about them.

Understanding your tax code is important because it ensures you’re paying the correct amount of tax. It can be easy to overlook, but having the right tax code can help you avoid surprises at the end of the year.