Why Has My Tax Code Changed? A Guide For Employees

If you’ve ever looked at your payslip and noticed your tax code has changed, you’re not alone. In the UK, HMRC updates tax codes for millions of employees each year, and while it may seem confusing, there’s usually a clear reason behind it. Tax codes directly impact how much Income Tax is deducted from your earnings, so understanding why they change is vital for ensuring you pay the right amount.

In this guide, we’ll explain why tax codes change, what the different codes mean, how to check if your code is correct, and what to do if you think there’s a mistake.

What Is a Tax Code?

A tax code is a series of numbers and letters that tells your employer or pension provider how much tax-free income you are entitled to before Income Tax is deducted. HMRC issues these codes based on your personal circumstances, income, and allowances.

For example, the most common code, 1257L, means you are entitled to the standard personal allowance of £12,570 for the tax year. But changes in your circumstances or corrections to previous years’ records can alter your tax code, leading to adjustments in your take-home pay.

Common Reasons Why Tax Codes Change

There are several reasons why HMRC may issue you a new tax code. Below are the most common situations:

1. Change in Employment

Starting a new job, leaving an old one, or having multiple jobs can all trigger a change. HMRC needs to ensure that your tax-free allowance is applied correctly to your main source of income.

2. Company Benefits

If you receive taxable benefits such as a company car, fuel allowance, or private medical insurance, these are added to your taxable income. HMRC adjusts your tax code to reflect this.

3. Underpaid or Overpaid Tax

If you underpaid tax in a previous year, HMRC can recover the shortfall by adjusting your tax code. Similarly, if you overpaid, they may correct this by updating your code.

4. Marriage Allowance Transfer

Couples eligible for the Marriage Allowance transfer may see their tax codes change to reflect the portion of personal allowance transferred.

5. High Earnings Over £100,000

For every £2 earned over £100,000, your personal allowance is reduced by £1. This results in a tax code adjustment.

6. Second Job or Pension Income

If you have more than one source of income, HMRC may allocate your allowance to one job and assign a different code, such as BR (Basic Rate), to the second.

7. Government Updates

At the start of a new tax year, HMRC may update your tax code to reflect the new personal allowance or other policy changes.

Common Tax Codes and What They Mean

Understanding the different codes can help you identify why yours has changed:

• 1257L: Standard code for most employees entitled to the full personal allowance.
• BR: Basic Rate; all income is taxed at 20%, usually applied to a second job.
• D0: All income is taxed at 40%, used for higher-rate taxpayers with multiple incomes.
• K codes: Indicate you owe tax or have benefits exceeding your allowance, so additional tax is collected.
• M/N: Marriage Allowance transfer between spouses.
• T: Indicates HMRC is checking your situation and may need further review.

How to Check If Your Tax Code Is Correct

Mistakes can happen, so it’s important to review your tax code regularly. Here’s how:

1. Check Your Payslip: Your tax code is listed on every payslip. Compare it with your previous payslips to spot changes.
2. Use Your HMRC Personal Tax Account: Log in online to see how HMRC has calculated your code.
3. Review Benefits and Income: Check if taxable benefits, new jobs, or pensions match HMRC’s information.
4. Contact HMRC if Unsure: If you think the code is wrong, call HMRC or use their online chat to request a correction.

What Happens If Your Code Is Wrong?

An incorrect tax code can have financial consequences:

• Overpayment of Tax: You’ll receive less take-home pay, but HMRC will usually issue a refund later.
• Underpayment of Tax: You may face an unexpected bill at the end of the tax year.
• Payroll Issues: Errors can create confusion for employers and employees alike.

This is why staying on top of your tax code is essential.

Employer Responsibilities

Employers must apply the tax code provided by HMRC to ensure correct PAYE deductions. They cannot change it themselves unless HMRC issues new instructions. If they apply the wrong code, it can cause compliance issues and penalties.

Employers also need to report all payroll data accurately through the Real Time Information (RTI) system. This ensures HMRC has up-to-date records of employees’ earnings and tax deductions.

The Role of Professional Payroll Support

Tax codes can be complex, especially for businesses with multiple employees, benefits, and varying work patterns. To avoid errors, many employers turn to professional providers of Payroll Services in Addiscombe. These experts handle PAYE calculations, apply the correct tax codes, and ensure full compliance with HMRC, saving businesses time and reducing risk.

Key Takeaways

• Tax codes change for many reasons, including job changes, benefits, marriage allowance, and unpaid tax.
• Common codes include 1257L, BR, D0, and K codes.
• Always check your payslip and HMRC account to ensure your code is correct.
• Employers must apply HMRC-issued codes and report payroll accurately.
• Professional payroll services can help manage tax codes, ensuring compliance and accuracy.

Final Thoughts

A change in your tax code doesn’t necessarily mean something is wrong — it usually reflects changes in your circumstances or HMRC updates. However, keeping an eye on your code is essential to avoid financial surprises. By understanding why tax codes change and knowing how to check them, both employees and employers can stay compliant and stress-free.