Tax Profile | Tax codes

Tax Profile | Tax codes

Overview

An employees tax code is used by their employer or pension provider to work out how much Income Tax is due by the employee. The HM Revenue and Customs (HMRC) will provide the tax code applicable to the respective employee.

Edition

This feature is available on all PaySpace editions.
Navigate > Employee > Basic Information > Tax Profile > Tax Details

Details

How are Tax Codes generated?

Tax codes provided to employees are alphanumeric and describe the way in which taxes are to be deducted from the employee.

What do the numbers in an employee's Tax Code mean?

The numbers in the tax code instructs the employer or pension provider on how much tax-free income the employee will receive within a tax year.

The HMRC works out the individual number based on the employees tax-free Personal Allowance and non-taxable income (such as untaxed interest or part-time earnings). They also consider the value of any company benefits (such as a company car).

Example
The employee is entitled to the standard tax-free Personal Allowance of £12,570, but will also receive medical insurance from their employer. As this is a company benefit, it lowers their Personal Allowance and will affect the employees tax code.
The medical insurance benefit of £1,570 is taken away from the employees personal allowance, resulting in a tax-free Personal Allowance of £11,000. This would mean the employees tax code is 1100L.

Did you know?
The standard Personal Allowance is £12,570, which is the amount of income employees do not have to pay tax on.
​An employees Personal Allowance may be more if they claim Marriage Allowance or Blind Person’s Allowance. It will be less if their income is greater than £100,000.

What do the letters in an employee's Tax Code mean?

The letters in an employee tax code refer to the situation and how it affects their Personal Allowance.

Letters in tax codes and what they mean:




Tax codes with ‘K’ at the beginning means that the employee has income that is not being taxed another way and is worth more than their tax-free allowance.

This type of tax code is usually applicable when the employee is paying tax that they owe from a previous year through their wages or pension, or receiving benefits that the employee needs to pay tax on - these can be state benefits or company benefits.

Did you know?
Employers and pension providers cannot take more than half the employees pre-tax wages or pension when using a K tax code.

Emergency Tax Codes

If an employee's tax code ends in ‘W1’ or ‘M1’ or ‘X’, this means that they are on an emergency tax code.

For example:
  1. 1257L WI
  2. 1257L MI
  3. 1257L X
An employee may be put on an emergency tax code if HMRC does not receive an employees income details in time after a change in circumstances such as:
  1. A new job.
  2. Working for an employer after being self-employed.
  3. Receiving company benefits or the State Pension.
Emergency tax codes are temporary. HMRC will usually update the tax code when the employee or their employer provides them with the correct details. 

If the change in circumstances means the employee has not paid the right amount of tax, they will remain on the emergency tax code until the correct tax has been paid for the year.

Why would an employee's Tax Code change?

HMRC may change/update an employees tax code due to the following circumstances:
  1. The employee starts a new job.
  2. The employee receives taxable state benefits.
  3. The employee begins to receive income from an additional job or pension.
  4. The employees weekly State Pension amount changes.
  5. The employer informs HMRC that the employee has started or stopped getting benefits from their job.
  6. The employee claims Marriage Allowance.
  7. The employee claims expenses that they get a tax relief on.

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