Limited company owners - how do HMRC tax codes work?

Every individual in the UK is assigned an HMRC tax code to make sure the right amount of tax is deducted from your income.

In this guide, we explain what tax codes are, why they might change, and what to do if you think your tax code is incorrect.

Decoding your tax code

Most tax codes are made up of a number followed by a letter.

The number represents how much personal allowance you are entitled to before tax is applied.

To calculate the allowance you can use, multiply the number by ten (e.g., 1257 x 10 = £12,570 for 2024/25).

The letter at the end provides additional information about your tax status.

L – The most common code, used for those under 65 eligible for the full personal allowance (e.g., 1257L for 2023/24 and 2024/25).
K – Applied as a prefix when untaxed income is greater than your personal allowance. This can happen if you owe tax from a previous year, receive taxable state benefits, or get benefits in kind.
OT – This means your personal allowance been used up, or you’ve started a new job and your employer does not have the details they need to provide you with a tax code
T – Indicates a reduction in personal allowance for those earning over £100,000 per year.
BR – All income is taxed at the basic 20% rate.
D0 – All income is taxed at the higher 40% rate.
D1 – All income is taxed at the additional 45% rate.
NT – No tax is deducted, either because earnings are below the personal allowance or you are a contractor paying National Insurance but not income tax.
W1 and M1 – Emergency tax codes are used when HMRC doesn’t have your full tax details (e.g., your P45 is missing). W1 applies to weekly pay, and M1 applies to monthly pay.
M and N – Relates to the Marriage Allowance. M means you have received 10% of your spouse’s personal allowance, while N means you have transferred 10% to your spouse.
S – Indicates earnings or taxable income from pensions are subject to Scottish tax rates.
C – Indicates earnings or taxable income from pensions are subject to Welsh tax rates.

There are many ways to find out what your current tax code is:

Typically, tax codes are issued between January and March each year, but they can also be updated at other times if your circumstances change.

Your tax code can change for several reasons, including:

Personal Allowance Adjustments – Your tax code will be updated accordingly whenever the personal allowance threshold changes (e.g., from £12,500 to £12,570 per year). For instance, it changed from 1250L to 1257L when the threshold increased a few years ago.
Additional Income – If you earn extra income from investments, property rentals, or other sources, your tax code will change to reflect these earnings.
Benefits in Kind – If you receive company benefits such as a vehicle, these are taxable and will alter your tax code.
Taxable State Benefits – Certain state benefits can also result in a tax code adjustment.
Multiple Jobs – If you have more than one job or receive a pension alongside your earnings, different tax codes may be assigned to reflect the tax-free allowance applicable to each source of income.

For example, let’s say you were issued a tax code of 1257L based on past earnings, but your current year’s income exceeds £100,000,

HMRC will adjust your tax code, assuming similar earnings next year. If you earn less, they will change your code again accordingly.

If you have paid too much tax during the tax year, due to an incorrect tax code, you can:

Check your tax code online via HMRC’s website (see above)
Get in touch with HMRC to request a refund if applicable.
Wait for an automatic refund (if HMRC identifies an overpayment at the end of the tax year, they will issue a P800 notice and process any refund owed).

Assuming your tax code is always correct – Errors can occur, and checking your payslips is essential.
Thinking BR codes apply only to second jobs – While often used for second jobs, the BR code may apply if HMRC doesn’t have your full income details.
Ignoring emergency tax codes – W1 and M1 are temporary tax codes and should be updated as soon as HMRC receives your updated current information.

If you believe your tax code isn’t correct, we recommend you take the following steps:

Contact your accountant – always the best person to talk to with anything tax-related.
Phone HMRC – Call 0300 200 3300 to speak to HMRC directly. Make sure you have your PAYE reference, Unique Taxpayer Reference (UTR), and National Insurance (NI) number to hand.
Submit an online query – You can complete a tax code query through HMRC’s online portal.