All workers in the UK are allocated a tax code by HM Revenue & Customs, which tells you things like your tax status and the size of your tax-free personal allowance.
In this guide we'll look at the different tax codes you might encounter, the important difference between a cumulative tax code and a non-cumulative tax code, and how Primis can help you make sure your tax code is correct.
What is a tax code
As mentioned above, your tax code acts as a reference to tell you how much you can earn tax-free and the rate of tax you need to pay on your earnings.
Where possible a standard tax code is allocated to people whose annual income is easily forecasted. If your pay rate fluctuates wildly from one pay period to the next, HMRC may assign you a different tax code.
HMRC take into account your personal situation – for example running your own company or working multiple jobs can all have an impact on the code HMRC assign to you.
Why might HMRC change my tax code?
For example, if you are normally paid weekly but, for any reason, receive a whole month's earnings in one pay period, HMRC could incorrectly estimate your annual earnings to be four times higher than they actually are.
This can trigger a change in tax code leading to you paying more tax. When this decision is made incorrectly, it's important to challenge it to avoid being out of pocket.
How can I change my incorrect tax code?
Your umbrella company cannot amend an incorrect tax code for you, as it's based on your personal taxes. To amend an incorrect tax code, you'll need to contact HMRC and ask them to do it.
Alternatively, you can log on to your online personal tax account and enter your up-to-date annualised earnings to trigger HMRC to adjust your tax code based on your actual figures.
How to understand your tax code
Your tax code may contain several numbers and one or more letters. In general, the numbers relate to your tax-free personal allowance, and the letter(s) tell you the tax rate you pay. There are some exceptions to this, so let's look at the different options in more detail.
What are the letters in my tax code?
The letter(s) in your tax code represent the tax status of each job you hold. You should have a tax code for each distinct employment position; they may not be the same.
● L is the standard tax status, which means that you are entitled to the basic tax-free personal allowance (£12,570 in 2024-25).
● BR is the 'basic rate' and is usually assigned to second jobs and/or pension income. This means that you have no personal allowance for this income; instead, the entire amount is charged tax at a rate of 20%.
● D0 applies in the same circumstances as BR, except that the tax rate applied to your income is the 40% higher rate.
● D1 again applies in the same circumstances as above but with an additional tax rate of 45%. It is typically allocated only if your income exceeds £125,140 a year.
● K is a prefix added to the front of your tax code, usually in the case that you owe HMRC tax arrears that they are in the process of recovering rather than requesting a single payment.
● OT is allocated when your annual personal tax-free allowance has been used up already. This can be beneficial when you know your total income will be over £125,140.
● M represents 'marriage allowance' and appears in your tax code if your spouse has transferred 10% of their personal allowance to you.
● N is the inverse of the above, i.e. you have transferred 10% of your personal allowance to your spouse.
● S is used as a prefix to represent that you are paying income tax at the standard Scottish rate.
● C is used as a prefix to represent that you are paying income tax at the standard Welsh (Cymru) rate.
● NT indicates that, for some reason, you do not pay any tax at all on this particular source of income.
● W1, M1 and X are all used to indicate a non-cumulative tax code, also called an emergency tax code. We'll look at those in detail below.
What are the numbers in my tax code?
The numbers in your tax code can have various meanings. The number 1257 normally represents the standard tax-free personal allowance of £12,570. You usually multiply the number in the tax code by 10 to get the total amount of income they can earn before being taxed.
In some cases, your tax-free allowance might differ from the standard amount. For example, a tax code of 947L would indicate that your personal allowance is £9,470. This number can be almost anything - it's not limited to just a few predefined thresholds.
If your tax code has a K prefix, the number indicate the amount of extra income that is added to your taxable income. For example, a tax code of K350 and a £30,000 salary would mean that you have £3,500 of extra income so your taxable income would be £33,500. This surplus will cause extra tax to be charged to cover the amount owed to HMRC.
What a cumulative tax code is
The normal PAYE tax code, 1257L, is an example of a cumulative tax code. This means the tax you pay is based on your total earnings for the year to date.
Each time you get paid, the tax is calculated based on how much tax you have already paid in the current year, alongside your remaining tax-free personal allowance.
A cumulative tax code means that your tax-free allowance is split between the number of pay periods across the tax year and can roll over into future pay periods until it is fully used up.
Cumulative tax example
For employees paid weekly, the employer divides the £12,570 personal allowance by 52 and applies tax on any earnings over £242 per week. For employees paid monthly, that equates to £1,048 per month.
● Month 1: Employee earns £800. This is less than £1,048, so no tax is deducted.
● Month 2: Employee earns £1,700. This is more than £1,048, so tax is payable.
Under a cumulative tax code, the tax-free allowance for both months is added together to give £2,096. The total earnings in this example would be £2,500, meaning tax should be charged on the £404 above the accumulated tax-free allowance.
Similarly if an employee's earnings should fall below the accumulated tax-free threshold, they may be entitled to a rebate of tax paid in previous pay periods, to ensure that they have paid the correct amount by the end of the financial year.
What a non-cumulative tax code is
A non-cumulative tax code means the tax you pay is based solely on each individual pay period in its own right regardless of what has happened in previous weeks/months.
There are three non-cumulative tax codes:
● W1 means that your normal pay period is weekly
● M1 means that your normal pay period is monthly
● X means that you don't have a fixed pay period
These are added as a suffix to your standard tax code, e.g. 1257LX, so the change can be quite easy to miss if you're not already aware of it.
In principle, these codes are usually a temporary measure. They are usually assigned when your employment status changes. However, it's possible to slip through the cracks and find yourself paying the wrong tax long-term.
Non-cumulative tax example
Taking the example of the employee used above, but under a non-cumulative tax code, each month would be treated as a distinct pay period for tax.
● Month 1: Employee earns £800. This is less than £1,048, so no tax is deducted.
● Month 2: Employee earns £1,700. Tax is charged based on the £652 over the month's allowance.
This means that the individual would pay more tax - £130.40 vs. £80.80 at a rate of 20%. Likewise, if their earnings should fall in later months, they would pay less tax (or no tax) in those months but would not receive a rebate until the end of the year.
Let Primis help with tax codes
We can provide you with full details of your tax obligations when working under Primis Contractor Services so that if HMRC changes your tax code unexpectedly, you know where you stand.
To find out more, contact us now via our online form, email sales@primisuk.com or give us a call on 01925 912200.
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