When you’re running a recruitment agency, it’s important to understand how tax codes work. This guide is designed to help you explain tax codes to your workers, so they can better understand what the codes mean and how they are created.
How do tax codes work and what do they mean?
The UK tax system can be complicated to understand because of the different combinations and special circumstances that could affect someone’s tax rate.
A tax code is a combination of numbers and letters used by HMRC to tell employers or pension providers how much income tax to deduct. It reflects personal circumstances like allowances, second jobs, or missing tax information.
Understanding your tax code helps ensure you’re paying the right amount of tax and not overpaying or underpaying.
Where can I find my tax code?
Tax codes are usually found on your payslips, on the HM Revenue and Customs (HMRC) app, or on a ‘Tax Code Notice’ letter from HMRC. It’s important to regularly check your tax code, as it could change and you could be at risk of owing money to HMRC. Or, you could be entitled to money back if you paid too much tax in the previous tax year.
How are tax codes calculated?
Tax codes are worked out by HMRC and they let your employer or pension provider know which code to use to deduct your income tax – either from your salary or pension. Your tax code isn’t permanent and it can change depending on your circumstances. Common reasons for a change include:
- Starting a new job with a different salary and/or benefits
- Receiving taxable state benefits
- Earning income from an additional job or pension
- A change in your State Pension amount
- Your employer reporting a change in job-related benefits
- Claiming Marriage Allowance
- Claiming tax deductible expenses
In most cases, HMRC will automatically update your tax code when your income changes. They will usually get this information from your employer. Then, you’ll get a letter from HMRC to let you know your tax code has changed and will be updated on your next payslip from your employer.
What is an emergency tax code?
An emergency tax code is used when HMRC doesn’t receive new income details in time for you to get paid. This happens after a change in circumstance, like starting a new job, or beginning a new job with an employer after being self-employed. Emergency tax codes are only given on a temporary basis and will change when the information is given to HMRC from you or your employer. This update can take up to 35 days.
What do the numbers mean?
The numbers in your tax code show how much of your income is tax-free each year.
When HMRC are working out your code, they will start with the tax-free personal allowance which is set at £12,570 for the 2024/25 tax year for most people. If you have no other income, you can earn up to this amount without having to pay any tax. HMRC will also take into consideration the value of any company benefits, such as a company car.
What do the letters mean?
The letters at the end of your tax code explain your specific tax circumstances. If you have more than one job, you will have a tax code for each one. Here is what the different letters mean in your tax code:
| L | Entitled to a basic tax-free personal allowance |
| T | Tax-free personal allowance is different to the standard amount |
| BR | All income is taxed at the basic rate, used for employees who have more than one job or pension |
| D0 | All income is taxed at the higher rate, used for employees who have more than one job or pension |
| D1 | All income is taxed at the additional rate, used for employees who have more than one job or pension |
| 0T | Personal allowance has been used up, or the employee has started a new job, and employer doesn’t have the details needed for a tax code |
| M | Marriage allowance – employee has received 10% of their spouse’s personal allowance |
| N | Marriage allowance – employee has transferred 10% of their personal allowance to their spouse |
| S | Income or pension is taxed using the rates in Scotland |
| C | Income or pension is taxed using the rates in Wales |
| K | Company benefits, state pension or tax owed from previous years are greater than their personal allowance |
| NT | No tax is payable on this income |
What are the different tax rates?
The amount of income tax deducted depends on your tax code and how much taxable income is above your personal allowance. The standard employee tax bands for the 2025/26 tax year is as follows:
| PAYE tax rate | Rate of tax | Annual earnings the rate applies to (above the PAYE threshold) |
| Basic tax rate | 20% | Up to £37,700 |
| Higher tax rate | 40% | From £37,701 to £125,140 |
| Additional tax rate | 45% | Above £125,140 |
We’re here to help
Tax codes can be confusing but we hope this guide has made things clearer for you and your contractors.
Let us know your thoughts and get in touch with our friendly team on 0114 478 9351 to have a chat or if you have any questions on tax codes or rates.
Disclaimer
This blog is intended for informational purposes only and does not constitute legal advice. The information presented is based on research conducted but it is essential to seek professional advice for specific guidance.
