Understanding Tax Codes: What They Mean and How to Check Yours

Tax codes. Those cryptic little combinations of numbers and letters sitting on your payslip, often ignored until your tax feels… well, a bit off. It’s one of the most common areas of confusion for employees, directors, and even seasoned small business owners. The good news? Once you know the basics, they’re not as scary as they look. Let’s break it down.

What is a tax code?

A tax code tells your employer (or pension provider) how much Income Tax to deduct from your pay or pension. HMRC sets the code based on your circumstances — personal allowance, benefits, second jobs, underpaid tax, and so on. Think of it as HMRC’s shorthand way of saying: “Take this much tax, leave them the rest.”

How tax codes are structured

Most tax codes are a number followed by a letter (e.g. 1257L).

• The number usually represents your tax-free Personal Allowance, divided by 10.

  • Example: 1257 means £12,570 of tax-free allowance.

• The letter tells your employer about your situation.

  
  

Common tax codes explained

• 1257L – The most common code, used if you get the standard Personal Allowance and have one job.

• BR – “Basic Rate.” All your income is taxed at 20% with no allowance. Often used for second jobs or pensions.

• D0 / D1 – Income is taxed at 40% (higher rate) or 45% (additional rate) on all earnings.

• K codes – A little scarier. They mean you owe tax on benefits, company cars, or other income that exceeds your allowance. Your employer adds this amount to your taxable pay before calculating tax.

• Emergency codes (e.g. 1257 W1 / M1) – Temporary codes, usually when you start a new job and HMRC doesn’t have your full details.

  
  

Why do tax codes change?

• You start or leave a job

• You get taxable benefits (like a company car)

• You have more than one job or pension

• You’ve underpaid (or overpaid) tax in a previous year

• You claim work-related expenses or allowances

• You’re a director taking dividends and a salary (HMRC sometimes adjusts your code to collect tax due on benefits or underpayments)

  
  

Myth-busting tax codes

• ❌ “HMRC always gets it right.” Not always. Codes are estimates based on information they have — if it’s out of date, your code might be wrong.

• ❌ “My mate has the same job as me, so we should have the same code.” Nope. Allowances, benefits, and side incomes all make a difference.

• ❌ “If my code changes, I must owe loads of tax.” Not necessarily. Sometimes changes reflect new allowances or adjustments in your favour.

  
  

A quick example: My Mate Dave

Picture this: you’re in the pub, pint in hand, and you say to your mate Dave, “I paid loads of tax last month — what’s going on?”

Dave replies, “That’s weird, I hardly paid any. You should speak to my accountant, he’s brilliant!”

But here’s the thing:

• Dave is a sole trader taking drawings — not on PAYE.

• You’re employed and on tax code 1257L.

• Dave’s tax is collected through Self Assessment once a year, yours is deducted monthly.

Different structures = different timing and tax codes. Pub comparisons aren’t always helpful.

Special mention: Directors

Directors often see quirky codes because of the way they’re paid:

• Salary through PAYE (with a code like 1257L)

• Dividends taxed separately through Self Assessment

• Benefits in kind (e.g. health insurance, company cars) included in a K code adjustment

This can make directors’ payslips look very different from their employees’. It’s normal — just another reason to double-check your code every so often.

How to check your tax code

• Look at your payslip or P60 — the code is usually next to your National Insurance number.

• HMRC may send you a PAYE Coding Notice (P2) if it changes.

• Use the official HMRC tool to check online:👉 Check your Income Tax for the current year

Practical checklist

✅ Find your code on your payslip or P60

✅ Check the number (does it match your allowance?)

✅ Understand the letter (L, BR, K, etc.)

✅ Compare with your personal situation — one job, multiple jobs, benefits?

✅ Use the HMRC online checker if in doubt

✅ If something looks wrong, contact HMRC or speak to your bookkeeper/accountant

Final thoughts

Tax codes might look like alphabet soup, but once you know what they stand for, they’re far less mysterious. The key thing to remember is that they’re not set in stone — they can and do change, and sometimes they’re wrong. A quick check now and then can save you from an unpleasant surprise later.

So, whether you’re an employee, a director, or just trying to keep up with what HMRC is up to, it’s always worth keeping an eye on those little numbers and letters. After all, it’s your money — and you want to make sure the right amount is staying in your pocket.