How Do Tax Codes Work?

Your tax code shows how much of your income from your job or pension is tax-free in the year.

If your tax code is 1257L your tax-free amount for the year is £12,570 – this is split evenly over the year so if you’re paid monthly it’s divided by 12 if you’re paid weekly it’s divided by 52.

If you don’t use all the tax-free amount in a week or month, the unused amount is carried forward to the following payday each week or month.

You pay tax on any amount over your tax-free amount & the rate of tax you pay, depends on your total income for the year and also where you live.

If you live in England, Wales or Northern Ireland – there are actually three rates of tax: basic rate, higher rate and the additional rate

If you live in Scotland there are five rates of tax: starter rate, basic rate, intermediate rate, higher rate and top rate.

Each rate of tax applies to a set amount of your annual taxable income – HMRC call these tax rate bands. The tax rate bands are split evenly over the year and used just like your tax-free amount. You can find the current income tax rate bands on gov.UK and there’s a useful calculator to help you estimate your income tax just search ‘estimate your income tax’ for the current year.

Some tax codes work differently such as BR and emergency tax codes you can find out about these and more about tax codes on gov.UK