What does the letter in the tax code on my payslip mean?

Posted 19/06/2019

It is an employer’s duty to provide their employees with a payslip weekly or monthly depending on their frequency of pay. If you are an employee, HMRC’s tax coding notices are usually posted out if your tax code is not the standard L code to explain why; it could be due to a P11D in the previous year that reduces your personal allowance, taxable income from another source such as pension income or another employment, or another reason. If you do not receive a tax code, you can generally deduce a reason behind the difference from the letters used on the payslip.

A standard tax code ends with the letter L. This shows that you are entitled to the full tax-free personal allowance in the year, and you will have tax deducted from your pay accordingly. If you have an M or an N, this indicates that marriage allowance has been applied. You will have an M if you received 10% of your partner’s personal allowance or an N if you transferred 10% of your personal allowance to them. Personal Allowance can only be transferred to your spouse, or from your spouse, if the person making the transfer does not earn taxable income to exceed the personal allowance limit. The allowance is not automatic and should be applied for through HMRC.

A T tax code is applied if there are calculations that affect your personal allowance, which will be broken down into brief details on your tax coding notice, and a note further explaining this on the second page. This can occur due to your taxable earnings exceeding £100,000, if you have a company benefit or company expenses among other reasons which would affect the personal allowance. If you have an 0T this is because your personal allowance has been used up or you have a new employer who does not have the information to apply the correct tax code.

If you have more than one job or pension, then often one of the payslips will show one of these tax codes. BR means that all income from that source is taxed at the basic rate of 20%, D0 is for the income from that source to be taxed at 40%, and a D1 if that source’s income was taxed at 45%. These tax rates are from the basic, higher and additional tax rates of tax; HMRC may apply the higher or additional rates if they believe your income will reach into those tax bands to ensure you pay enough tax at source.

If the income is taxed in Wales, there will be a C at the beginning of your tax code. Currently, the tax rates in Wales are the same as the English tax rates, so CBR will indicate employment income that has been taxed at 20% in Wales before payment reached the employee.

If the income is taxed in Scotland, there will be an S at the beginning of the tax code. The tax rates in Scotland are a little different from those in England and Wales. An SBR tax code indicates the basic rate tax of 20%, then it increases to SD0 which uses the intermediate rate of 21%. 41% is taxed on SD1 for the higher rate, and the top rate of tax is 46% for tax code SD2.

If you are not paying any tax on the income from an employer or pension, your tax code will read as NT.
If you believe your tax code is incorrect, or if you move countries within the UK, you should contact HMRC directly who will make any necessary changes and inform your employer of the new tax code they should use. You may need to pay HMRC additional tax if you have not paid enough through the tax year to date. Alternatively, if you have paid too much in tax then HMRC will refund you the difference.

Tags: personal tax, PAYE, tax codes, self assessment tax return, employment income