When you look at your payslip, you may notice a combination of numbers and letters under the heading “tax code.” This entry can seem confusing at first, but it plays a big role in how much income tax you pay. In the UK, your tax code is set by HM Revenue & Customs (HMRC) and directly affects what is taken from your wages or pension. In this blog, we explain how to understand your tax code.
Understanding what it means, why it might change, and how to spot any issues will help you feel more secure about your finances. If you still have questions, we can help at GHLD.
What is a tax code?
Your tax code is a short reference used by HMRC to determine your allowance (the amount of income you can earn without paying tax) and how the rest of your wages or pension should be taxed. Employers and pension providers use this code to calculate how much tax to deduct from your earnings.
Each part of the code refers to your tax circumstances. If you have multiple jobs or pensions, each source of income might have its tax code. The goal is to make sure you pay the correct amount of tax across all of your income.
How does your tax code affect your take-home pay?
Your tax code ultimately decides how much income tax is deducted. If your code is incorrect, you could pay too much or too little tax. Paying too much can leave you with less disposable income each month while paying too little risks an unexpected bill from HMRC later on. Taking the time to understand your code helps you avoid unwanted surprises.
A closer look at common tax codes
Many employees have a code like “1257L,” although codes can vary. The numbers often represent your tax-free allowance, while the letter usually indicates how your allowance is applied. The standard code is often used for people who have one main source of income, receive a basic personal allowance, and have no untaxed sources of income.
- Numbers: If your code is 1257, the number typically relates to your tax-free allowance.
- Letter: The letter can indicate specific conditions, such as L (standard allowance), M or N (transferred marriage allowance). If your tax code has a ‘K’ at the beginning this means that you are likely to have income that is not being taxed another way and it is worth more than your tax-free allowance. For most people, this may typically happen when you are paying tax you owe from a previous year through your wages or pension, or getting benefits you need to pay tax on – these can be state benefits or company benefits.
In the 2025/26 tax year, most people will continue to have a code that starts with 1257 if they have a single income source and their situation is straightforward. However, this may not be the case for everyone, so it is a good idea to check your code on your payslip to confirm.
Reasons why your tax code might change
Tax codes can change for many reasons. Some of the most common include:
- Starting a new job or receiving a pay rise: HMRC might adjust your code based on new salary information.
- Receiving benefits: Workplace benefits such as a company car can affect your allowance and tax code.
- Changing personal circumstances: Getting married or entering a civil partnership can alter your code, especially if you transfer part of your allowance.
- Having more than one source of income: HMRC might issue different codes to each employer or pension provider, ensuring your allowance is accounted for and not doubled up.
- Tax underpayments or overpayments: If HMRC finds that you owed additional tax in a previous year, your code may be adjusted to collect the underpayment, or if you overpaid, your allowance might be increased.
It can be easy to overlook these changes, so we often encourage individuals to review their code whenever they move jobs or notice a difference in pay.
Checking if your tax code is correct
You can confirm if your tax code is correct by reviewing the personal tax account on HMRC’s official website or by checking any letters HMRC sends. It is also wise to look at your payslip regularly to see if your code remains the same from one month to the next.
If you need a quick guide on where to find your tax code or how to view your personal tax account online, HMRC provides further information here.
You can check for differences by comparing the code on your payslip to the one HMRC shows in your account. If you suspect an issue, we suggest contacting HMRC or contacting us at GHLD for support.
What if you think your tax code is wrong?
If you believe your code is incorrect, you should inform HMRC immediately. This step might involve giving them your current salary, benefits, or any changes that could affect your allowance. HMRC may send you a revised code, which your employer or pension provider will use for future deductions.
Sometimes, you can correct any underpayment or overpayment by adjusting your code for the following tax year. That allows you to spread out repayments rather than facing a large bill in one go.
Staying informed and avoiding mistakes
We believe staying informed about how your taxes are calculated is always better. We recommend that you:
- Keep your details updated with HMRC if anything changes.
- Check all letters from HMRC or any new codes issued by your employer.
- Speak to us if your situation changes, such as taking on a second job or receiving a new benefit.
If you would like tailored support, we are here to help.
Where we can help
It can sometimes feel overwhelming when you notice a change in your take-home pay or if you have multiple codes for different jobs. We at GHLD take pride in offering practical advice that fits your circumstances. Our team is experienced in checking if your tax code is correct and discussing any necessary adjustments. We can also guide you through communicating with HMRC if needed.
Wrapping up
Your tax code is an important part of your payslip. Although it may look complicated at first, it serves a simple purpose – it helps your employer or pension provider figure out how much Income Tax to deduct based on the personal allowance you are entitled to. By recognising the numbers and letters in your code, understanding why it might change, and knowing how to correct any mistakes, you can ensure you are paying the right amount of tax for the 2025/26 tax year.
We hope this blog has been helpful in finding out how to understand your tax code. Contact GHLD for any and all advice on your personal tax matters. Whether you think your code needs updating or want a professional opinion, we are here to help.
