Understanding your employees' tax codes
Overview
You put an employee’s tax code into your payroll software to work out how much tax to deduct from their pay throughout the year.
There’s a separate guide on tax codes if you’re an employee.
What you need to do
When you take on a new employee, you normally work out their tax code by using their P45. The code will usually be made up of several numbers and a letter, such as 1060L.
You usually need to update your employee’s tax code at the start of a new tax year. If the tax code changes during the year, HM Revenue and Customs (HMRC) will email you - you should update your payroll records as soon as possible.
Tax code 1060L
The most common tax code for tax year 2015 to 2016 is 1060L. It’s used for most people born after 5 April 1938 with one job and no untaxed income, unpaid tax or taxable benefits (eg company car).
1060L is an emergency tax code only if followed by ‘W1’, ‘M1’ or ‘X’. Emergency codes can be used if a new employee doesn’t have a P45.
What the numbers mean
The numbers in an employee’s tax code show how much tax-free income they get in that tax year.
You usually multiply the number in the tax code by 10 to get the total amount of income they can earn before being taxed.
For example, an employee with the tax code 1060L can earn £10,600 before being taxed. If they earn £27,000 per year, their taxable income is £16,400.
The process is different if the employee has the letter ‘K’ in their tax code.
What the letters mean
Letters in an employee’s tax code refer to their situation and how it affects their Personal Allowance.
| Code | How tax is deducted | When this code is usually used |
|---|---|---|
| 0T | From all income - there is no Personal Allowance | When an employee hasn’t given you a P45 or enough details to work out their tax code, or when their Personal Allowance has been used up |
| BR | From all income at the basic rate | For a second job or pension |
| D0 | From all income at the higher rate | For a second job or pension |
| D1 | From all income at the additional rate | For a second job or pension |
| L | At basic, higher and additional rates depending on the amount of taxable income | For an employee born after 5 April 1938 who is entitled to the standard tax-free Personal Allowance |
| M | At basic, higher and additional rates depending on the amount of taxable income | For an employee whose spouse or civil partner has transferred some of their Personal Allowance |
| N | At basic, higher and additional rates depending on the amount of taxable income | For an employee who has transferred some of their Personal Allowance to their spouse or civil partner |
| NT | No tax is deducted | Very specific cases, eg musicians who are regarded as self-employed and not subject to PAYE |
| T | At basic, higher and additional rates depending on the amount of taxable income | When HM Revenue and Customs (HMRC) needs to review some items with the employee |
| Y | At basic, higher and additional rates depending on the amount of taxable income | For an employee born before 6 April 1938 who is entitled to a bigger Personal Allowance |
If your employee’s tax code has ‘W1’ or ‘M1’ at the end
W1 (week 1) and M1 (month 1) are emergency tax codes and appear at the end of an employee’s tax code, eg ‘577L W1’ or ‘577L M1’. Calculate your employee’s tax only on what they are paid in the current pay period, not the whole year.
Tax codes with the letter ‘K’
The letter K is used in an employee’s tax code when deductions due for company benefits, state pension or tax owed from previous years are greater than their Personal Allowance.
Multiply the number in their tax code by 10 to show how much should be added to their taxable income before deductions are calculated.
Example An employee with tax code K475 and a salary of £27,000 has taxable income of £31,750 (£27,000 plus £4,750).
The tax deduction for each pay period can’t be more than half an employee’s pre-tax pay or pension.
Changes during the tax year
Usually someone’s tax code changes if their tax-free income (Personal Allowance) goes up or down, eg they start or stop receiving a taxable benefit like a company car.
HM Revenue and Customs (HMRC) will send you an email alert if one of your employees’ tax codes changes.
Access the new tax code in PAYE Online (in ‘tax code notices’), the PAYE Desktop Viewer application, or in your payroll software (if it has this feature).
Update your employee’s payroll record with their new tax code as soon as possible, and before their next payment.
A tax code notice is sometimes called a P6 form.
If you receive an employee’s new tax code too late to use in the tax year, you should use it in the new tax year.
Updating for the new tax year
HM Revenue and Customs (HMRC) will tell you about any new tax codes to use for your employees in the new tax year.
If an employee’s tax code isn’t changing, HMRC won’t contact you and you should carry forward the employee’s tax code to the new tax year.
If your employee’s tax code ends with ‘M1’ or ‘W1’ (‘month 1’ or ‘week 1’), don’t carry this part of the code into the new tax year.
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