Ever glanced at your payslip and wondered what those letters and numbers in your tax code mean? You’re not alone. Tax codes play a huge role in how much income tax is taken from your earnings. Getting it right means peace of mind—getting it wrong can cost you money. Let’s break down what tax codes really are and how they affect your paycheck.
What is a Tax Code?
A tax code is a short string of numbers and letters issued by HMRC that tells your employer how much tax-free income you’re entitled to. Most people in the UK get a personal allowance—this is the amount of income you can earn before you start paying income tax. For the 2025 tax year, the personal allowance remains £12,570.
If your tax code is 1257L, it means you get the full allowance. The “1257” stands for £12,570, and the “L” shows you’re eligible for the basic tax-free amount. Simple, right?
But not everyone has the same code. If you’ve got multiple jobs, receive taxable benefits like a company car, or are paying back underpaid tax, your code could look very different. That’s why it’s so important to understand what yours means.
Why Tax Codes Matter
Your tax code determines how much tax is taken from your income before it reaches your bank account. If it’s wrong, you might be paying too much or too little. Overpaying could leave you short month to month, while underpaying might result in a nasty surprise bill from HMRC down the line.
Common codes include:
- BR – Basic Rate, taxed at 20% with no allowance.
- D0 – Higher Rate, taxed at 40%.
- K Codes – You owe more tax, and it’s deducted in addition to your current income.
Where to Find and Check Your Tax Code
You’ll find your tax code on your payslip, P45, P60, or via your HMRC Personal Tax Account online. It’s smart to review it regularly, especially after life events like starting a new job, retiring, or going self-employed. If it doesn’t look right, contact HMRC directly. It’s your responsibility to fix errors—not your employer’s.
When Your Tax Code Changes
Tax codes aren’t fixed forever. They can change due to:
- A new job or employer
- Switching from part-time to full-time
- Receiving a company benefit
- Claiming marriage allowance
- Retiring or drawing a pension
Even students and pensioners can have tax codes adjusted. For example, if your pension income pushes you above your tax-free allowance, HMRC may tweak your code to make sure the right amount of tax is taken.
Final Thoughts
Understanding your tax code might not sound exciting, but it can save you a lot of stress and money. Always check your payslip, know what the code means, and reach out to HMRC if something doesn’t add up. A few minutes of attention could save you hundreds—or more—each year.