Limited company owners – how do HMRC tax codes work?

You are assigned a tax code by HMRC so the correct amount of tax can be deducted from your earnings by your employer. Tax codes are typically issued between January and March each year, but at other times as well if there’s a change in your circumstances.

For instance, you may have been given a tax code of 1257L, so you get the maximum personal allowance for this year based on your previous earnings, but actually, earn more than £100,000.

As this puts you over the limit, HMRC issues you with a new tax code on the presumption that you’ll earn a similar amount next year. Should you, in fact, go on to earn less, your code will be changed again to reflect this.

Other reasons why your tax code changes:

• Whenever the personal allowance threshold changes, for example, from £12,500 to £12,570 a year, your tax code will change. In this example, it changed from 1250L to 1257L.
• If you earn additional income during the tax year from investments, property rental, or other means, your tax code will change to reflect this.
• Your code will change if you receive so-called ‘benefits in kind’ from your company or employer, such as a company vehicle.
• If you receive any state benefits that are taxable.

Most tax codes start with a number and end with a letter. The numbers are to indicate how much personal allowance you’re entitled to before tax is payable.

Multiply the number element by ten, as in 1,257 x 10 = 12,570 ( the full personal allowance for 2023/24, to see how much your personal allowance is for the year.

The letter at the end reflects your particular situation in the present tax year and how it affects your personal allowance.

Understanding the tax code letters

The tax code letters are as follows:

L

The most common of all tax codes, L means you are under 65 and are eligible for the full personal allowance, the amount you can earn before paying tax. For 2022/23 and 2023/24 this is 1257L.

K

This letter appears as a prefix to your tax code and applies if you have additional untaxed earnings that exceed your personal allowance. This could occur if you are paying back taxes from a previous year, receiving benefits in kind, or receiving taxable state benefits.

OT

Your income has reached £125,000 or more, so you lose all of your personal allowance for the year. This code may also be used if you change jobs and your new employer doesn’t have all the details they need to apply for a tax code.

T

Used for those earning over £100,000 per year to show a reduction in the personal allowance.

BR

Shows that all income is to be taxed at the basic rate, currently 20%.

DO

Shows all income is to be taxed at the higher rate, currently 40%.

D1

Shows all income is to be taxed at the additional rate, currently 45%.

NT

This code means no tax is to be taken because your earnings are less than the personal allowance, or if you are a contractor liable for National Insurance contributions but not income tax.

W1 and M1

These are emergency tax codes, applied when the tax office doesn’t have all the details they need about you to issue the correct code. This happens if you don’t have your P45 from a previous employer, or receive your first income in the middle of a tax year. W denotes weekly pay; M is for monthly.

M and N

Under the current Marriage Allowance, you can pass 10% of your personal allowance to your spouse. The M code means you have received this from your spouse; the N code shows you have transferred 10% of your allowance to your spouse.

S

This code means your earnings or taxable income from pensions is taxed according to the rates in Scotland.

Think your tax code is wrong?

• If you think your tax code is wrong, speak to your accountant or your employer in the first instance.
• You can also call HMRC on 0300 200 3300, with your PAYE reference, UTR (unique taxpayer reference) and your NI number to hand.
• You can also complete a coding notice query online.