You put an employee’s tax code into your payroll software to work out how much tax to deduct from their pay throughout the year.
Tax code 1250L
The most common tax code for tax year 2019 to 2020 is 1250L. It’s used for most people with one job and no untaxed income, unpaid tax or taxable benefits (for example a company car).
1250L is an emergency tax code only if followed by ‘W1’, ‘M1’ or ‘X’. Emergency codes can be used if a new employee doesn’t have a P45
What Tax code 1250L Means
The numbers in an employee’s tax code show how much tax-free income they get in that tax year.
You usually multiply the number in the tax code by 10 to get the total amount of income they can earn before being taxed.
For example, an employee with the tax code 1250L can earn £12,500 before being taxed. If they earn £27,000 per year, their taxable income is £14,500.
What you need to do
When you take on a new employee, you normally work out their tax code by using their P45. The code will usually be made up of several numbers and a letter, such as 1250L.
You must report this information to HM Revenue and Customs (HMRC) using a Full Payment Submission (FPS) on or before your new starter’s first payday.
Before you can work out your new employee’s tax code and starter declaration, you’ll need to:
- confirm you need to pay them through PAYE
- collect information from them – usually from their P45
You usually need to update your employee’s tax code at the start of a new tax year. If the tax code changes during the year, HM Revenue and Customs (HMRC) will email you – you should update your payroll records as soon as possible.
What the letters mean in Tax Codes
Letters in an employee’s tax code refer to their situation and how it affects their Personal Allowance.
| Code | How tax is deducted | When this code is usually used |
|---|---|---|
| 0T | From all income – there is no Personal Allowance | When an employee hasn’t given you a P45 or enough details to work out their tax code, or when their Personal Allowance has been used up |
| BR | From all income at the basic rate | For a second job or pension |
| C | From income in the Welsh tax bands | For an employee whose main home is in Wales |
| C0T | From all income – there is no Personal Allowance | When an employee whose main home is in Wales hasn’t given you a P45 or enough details to work out their tax code, or when their Personal Allowance has been used up |
| CBR | From all income at the basic rate in Wales | For a second job or pension |
| CD0 | From all income at the higher rate in Wales | For a second job or pension |
| CD1 | From all income at the additional rate in Wales | For a second job or pension |
| D0 | From all income at the higher rate | For a second job or pension |
| D1 | From all income at the additional rate | For a second job or pension |
| L | At basic, higher and additional rates depending on the amount of taxable income | For an employee entitled to the standard tax-free Personal Allowance |
| M | At basic, higher and additional rates depending on the amount of taxable income | For an employee whose spouse or civil partner has transferred some of their Personal Allowance |
| N | At basic, higher and additional rates depending on the amount of taxable income | For an employee who has transferred some of their Personal Allowance to their spouse or civil partner |
| NT | No tax is deducted | Very specific cases, for example musicians who are regarded as self-employed and not subject to PAYE |
| S | From income in the Scottish tax bands | For an employee whose main home is in Scotland |
| S0T | From all income – there is no Personal Allowance | When an employee whose main home is in Scotland hasn’t given you a P45 or enough details to work out their tax code, or when their Personal Allowance has been used up |
| SBR | From all income at the basic rate in Scotland | For a second job or pension |
| SD0 | From all income at the intermediate rate in Scotland | For a second job or pension |
| SD1 | From all income at the higher rate in Scotland | For a second job or pension |
| SD2 | From all income at the top rate in Scotland | For a second job or pension |
| T | At basic, higher and additional rates depending on the amount of taxable income | When HMRC needs to review some items with the employee |
If your employee’s tax code has ‘W1’ or ‘M1’ at the end
W1 (week 1) and M1 (month 1) are emergency tax codes and appear at the end of an employee’s tax code, for example ‘577L W1’ or ‘577L M1’. Calculate your employee’s tax only on what they are paid in the current pay period, not the whole year.
Tax codes with the letter ‘K’
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.
Multiply the number in their tax code by 10 to show how much should be added to their taxable income before deductions are calculated.
ExampleAn employee with tax code K475 and a salary of £27,000 has taxable income of £31,750 (£27,000 plus £4,750).
The tax deduction for each pay period can’t be more than half an employee’s pre-tax pay or pension.
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