A Comprehensive Guide: Understanding Tax Codes 2022/23

When it comes to payroll queries, tax code-related questions are among the most common our customer service team receives. To demystify tax codes and shed light on their implications for your take-home pay, we have put together this brief guide to help you. 

What is a tax code?

A tax code helps you determine how much PAYE ( Pay As You Earn) tax you pay on your salary. 

Calculating PAYE Tax For employees

The PAYE tax system relies on your tax code to determine the amount of income you can earn before you start paying taxes. This allowance is called your personal allowance. If you are employed under Futurelink Group’s Umbrella PAYE Solution, we will manage all your income tax and National Insurance contributions – our solution also offers SSP (Statutory Sick Pay) and SMP (Statutory Maternity Pay) to every worker, along with a comprehensive Pension Scheme offered through NEST.

Tax Rates for 2022/23

 The personal allowance for 2022/23 remains £12,570, with a corresponding tax code of 1257L. This means most taxpayers can earn up to £12,570 per year on a cumulative basis without incurring any tax. 

Decoding the Letters in Your Tax Code

The Letters in your tax code refer to your situation and how it affects your Personal Allowance. If you have more than one job, you will have a separate tax code for each position.  

Here is what each letter means: 

L – You are entitled to a basic tax-free personal allowance.  

M – “Marriage Allowance” – 10% of your partner’s personal allowance has been transferred to you. 

N – The reverse of “M” – you have transferred 10% of your personal allowance to your partner. 

T – Your tax code considers other calculations to determine your personal allowance, reduced due to higher income. 

OT – Your Personal Allowance has been used up, or you have started a new job and your employer does not have the details they need to give you a tax code. 

BR –   All your income from this job or pension is taxed at the basic rate of 20% on all your income – usually used if you have more than one job or pension. Therefore, you are not receiving a personal allowance on this income. The personal allowance is the tax-free amount you can earn before paying income tax. This is currently £12,570. (Tax Year 2022/23). 

D0 – You are being taxed at the higher rate of Income Tax (40%) on all your income from this job, without the benefit of a tax-free Personal Allowance! 

D1 – Subject to the Additional Rate of 45% tax, usually applicable for income over £150,000. 

NT – You are not paying any tax on this income. 

S – Your income is taxed at the Scottish rate of income tax. 

K – HMRC is recovering the tax you owe. 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.   

R – All income from this job or pension is taxed at the basic rate (e.g., if this is your second job).  

Y – You were born before 6th April 1938 and receive a higher personal allowance 

Emergency Tax Codes

If your tax code has ‘W1’ or ‘M1’ or ‘X’ at the end. You are on an emergency tax code. 

 You may be put on an emergency tax code if HMRC does not get your income details in time after a change in circumstances such as: 

  • a new job 
  • working for an employer after being self-employed 
  • getting company benefits or the State Pension 

Emergency tax codes are temporary. HMRC will usually update your tax code when you or your employer gives them your correct details. If your change in circumstances means you have not paid the right amount of tax, you will stay on the emergency tax code until you have paid the correct tax for the year. 

If you think your tax code is not correct, please contact HMRC using their online service or call 0300 200 3300.  
HMRC will then contact Futurelink Group automatically with a revised tax code as required. This can take up to 10 days but as soon as we receive notification, we will apply the new code to your next payment. 

 If you need further guidance or have any queries, please do not hesitate to contact our customer service team  

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