Tax Code Definition: UK Tax Codes Explained

Income Tax – This is the most common form of taxation in Britain. It is levied on every individual, corporation and trust. In simple terms, it is the percentage of your earnings that goes into the government’s coffers.

Corporation Tax – This is charged against companies and trusts. It is calculated on profits and losses.

VAT – The value added tax is applied to goods and services sold within the United Kingdom.

The basic principle behind taxation is that everyone pays according to his ability to pay. If someone earns £1 million per annum and spends £100,000 on luxury items, he must still pay income tax even though he doesn’t really need to.

This is because the government wants to make sure that rich people don’t become richer than poor people.

Taxes are collected by HM Revenue and Customs (HMRC).

What Is a Tax Code?

A tax code is a set of laws that govern how much money you pay in taxes each year. In some cases, there are no taxes; in others, it depends on income level.

Taxes vary widely across countries. Some nations impose high taxes on businesses, while others don’t charge anything. Other countries levy taxes on individuals based on their income levels.

In some countries, people pay taxes directly to the government. Others use third parties to collect taxes. These third parties include banks, credit card companies, insurance providers, etc.

The most common form of taxation is called indirect taxation. Indirect taxes are levied on goods and services rather than on people. Sales taxes are one type of indirect tax. In addition to sales taxes, governments often levy excise taxes on products like gasoline, alcohol, tobacco, etc. Excise taxes are usually collected by third party retailers.

Who Receives a Tax Code?

A sole trader doesn’t receive a tax code because they are self-employed. They pay income taxes directly into HMRC’s bank account.

An employee’s tax code is displayed on his/her payslip because he/she receives it via PAYE.

A company’s tax code appears on its accounts statement because it must file annual returns with HMRC.

What is my appropriate tax code?

Your tax code is determined by how many personal allowances and allowances for specific expenses you qualify for. If you’re self-employed, it’s even more complicated. You’ll want to check out our guide to calculating your tax code here.

A tax code notice is sent out to all taxpayers who are owed a tax code change. This includes those who haven’t filed their tax returns yet or those whose tax return hasn’t been processed.

Contact HM Revenue & Customs if you think you’ve received a wrong tax code notice. They can help you resolve the issue.

Tax codes aren’t just about what you pay in taxes, but there are other factors to take into consideration. For example, you might be eligible for child benefit, free school meals, or housing benefits. These things affect how much tax you actually pay.

There are two main ways to work out your personal income tax: Pay As You Earn (PAYE) and Self Assessment.

Pay As You Earn is where you earn less than £100,000 per annum and don’t qualify for additional allowances, you file your tax return online. You can find out more information about PAYE here.

Self assessment is where you earn over £100,000 per year and you qualify for additional allowances, such as childcare credits. You file your tax return online via the Self Assessment Portal.

A list of tax codes and their definitions

The UK government uses different types of tax code to classify businesses and individuals based on their income and assets. Here are the most common ones used today.

There are five main tax codes used in the UK. They are Income Tax, Corporation Tax, Capital Gains Tax, Inheritance Tax and Gift Aid.

Income Tax

This type of tax is charged on every individual’s earnings. This includes wages, salaries, interest, dividends, bonuses, pensions, royalties and capital gains.

Corporation Tax

This type of taxation is levied on companies based on their profits. It applies to large corporations such as banks, insurance companies, telecoms providers, utilities, mining firms, construction companies and retail chains.

Capital Gains Tax

K Tax Code Explained

A K tax code means that your annual tax bill will be based on how much you earn each year, rather than having to pay it off in instalments throughout the year. This means that if you earn £10,000 in one month, you’ll pay £1,000 in tax. If you earn £15,000 in one month you’ll pay £2,000 in tax. And if you make £20,000 in one month – well, you know what happens.

You will still have to declare everything you earn above £7,500, even though you don’t have to pay anything towards it until April 5th 2020. You’ll still have to file your return no matter where you live, although some people are finding themselves paying slightly different rates depending on where they live.

What is the meaning of the Tax Code Number?

As you might have noticed, there are numbers preceding each letter in your tax code. What do those numbers stand for? They represent how much money you can make without paying tax. In most cases, the number can be multiplied by ten to give you the maximum amount of income you can earn before being taxed. Here’s an example:

Tax code 1257L represents £12,570. If you earned £13,000, you wouldn’t pay tax because you earned less than the threshold (£12,570). However, if you earned £15,000, you’d owe HMRC £3,030 – the difference between £12,570 and £15,000.

Emergency Tax Codes

Construction workers and tradespeople are often placed on an emergency tax status known as “emergency tax.” The tax code gives employees until HM Revenue & Customs (HMRC) works out which tax code they fall under.

Here are some reasons why you could be placed on emergency tax.

You’ve started a new job and don’t have your P45 from your old employer.

You’re starting your very first job.

You’d been self-employed and became an employee (and are paid via PAYE).

Common UK Tax Codes

The following are common UK tax codes used by employers. They apply if you earn less than£100,000 per year (£10,000 per month).

Tax Code 1257L

The 2020/21 tax year saw the introduction of a new personal allowance for employees of up to £12,570 per annum. This was introduced to replace the previous £11,850 figure. As such, there are now three different types of tax codes that employers can use to calculate their employees’ pay. These include:

• 1257L – for those earning less than £16,385;

• 1258L – for those earning between £16,386 and £34,865;

• 1259L – for those earning over £35,866.

Tax Codes 1256L or 1283L

The UK government introduced a number of changes to personal allowance rates and thresholds in April 2017. In addition to the introduction of Universal Credit, there are some changes to tax credits and the threshold for the 40p income tax band.

There are two main types of tax code – the standard allowance and the flat rate allowance.

A standard allowance is based on how much money you make and what it costs to live in the UK.

Flat rate allowances are based on the amount of earnings you receive above £6,420 per annum. This includes bonuses, overtime payments, commission payments, dividends and interest.

You can use the following table to work out whether you qualify for either type of allowance.

Standard Allowance

If you earn less than £7,440 per annum, you are eligible for a standard allowance. You can claim up to £1,290 per month.

How are Tax Codes Worked out?

HM Revenue & Customs (HMRC) will take all these things – including your income level, occupation, and type of property – into account before deciding how many pounds you owe in taxes. You can find out what your personal allowance is based on your circumstances here.

The personal allowance is calculated differently depending on your age, marital state, number of children, whether you are self-employed, and even where you live. For example, it’s £11,500 for someone aged 65 or over; £8,100 for people under 35 who are single parents; and £10,600 for those living in London.

You can also find out what your tax band is based on your circumstances. This is the amount of money you can earn without paying any additional tax. If you earn less than this amount, you won’t pay any extra tax. But if you earn more, you’ll be charged 20% on anything above this figure.

For example, if you earn £15,000 per annum, you’d fall into Band D, which means you’re liable for 20% tax on earnings up to £14,850. Anything earned above this limit falls within Band E, where you face 40% tax on earnings above £18,700.

If you want to know more about how tax codes work, check out our guide on How Do I Calculate My Taxes?

What To Do If You’re Assigned The Incorrect Tax Code

Taxes are one of those things you don’t really think about until it’s too late. But unfortunately, mistakes happen – and sometimes it’s easy to make. Whether you’ve got a mistake in your self-assessment return or you’ve accidentally left out some income, we’ll show you how to sort it out.

If you’re placed on the wrong tax code, you might find yourself having to pay extra money back. This could mean missing out on discounts and benefits, such as free school meals or childcare vouchers. So what do you do if you’re placed on the incorrect tax code?

You can contact HM Revenue & Customs (HMRC) directly. They’ll let you know whether you’re eligible for a refund and if you need to file another form. Or you can use our guide to see if you qualify for a refund.

But if neither option works, you can always try contacting your local council. They might be able to help. And if you’re still stuck, you can even ask your bank for advice.

Frequently Asked Questions

Do I have to pay income tax in Scotland?

The following table explains who is a Scottish taxpayer. If you are unsure whether you are a Scottish taxpayer, please use our calculator here.

Income tax rates for Scottish taxpayers

Taxable income (£)

Rate (%)

Up to £15,856

0%

£16,001 – £30,500

Who can be a taxpayer in Scotland?

If you are a British citizen living in Scotland, you may be able to claim Scottish Income Tax relief. If you live outside of Britain, but pay UK taxes, you may still qualify for Scottish Income Tax relief because it is based on where you earn your money, rather than where you live.

You must be a resident of Scotland for 183 days during the tax year. This includes holidays such as Christmas Day and New Year’s Eve.

To be a Scottish taxpayer, you must either be a natural person or a legal entity. A legal entity could include trusts, deceased estates, a bodies of trustees and personal representatives.

A trust is a set-up where one person holds assets for the benefit of another person. For example, a family member might hold shares on behalf of someone else.

In most cases, the trustee will be required to submit a form to HM Revenue & Customs (HMRC), declaring themselves to be a Scottish taxpayer.

The form is called Form ST4. It needs to be completed within three months of the end of the tax year.

Trustees can use the same form if they act as a personal representative for someone who died during the tax year.