Written by Richard Rowell
Published on March 15, 2010

Tax codes can be confusing. Just what do they mean and how do they work?

A tax code will be issued by HMRC for your employees and dictates how much tax you should deduct from your employees. The tax code will be issued to you as an employer on a form P6.

The code itself will be a combination of numbers and letters. If you multiply the numbers by 10 you arrive at the income your employee earns annually before you deduct tax. The letter has a special meaning and applies to different circumstances. The large majority of employees will have an L which means that they are eligible for the basic personal allowance each year.

The table below sets out the meaning for the various letter codes

Letter     Meaning

L          For those eligible for the basic Personal Allowance. It is also used for 'emergency' tax codes
P          For people aged 65 to 74 and eligible for the full Personal Allowance
Y          For people aged 75 or over and eligible for the full Personal Allowance
T          If there are any other items we need to review in your tax code
K          When your total allowances are less than your total 'deductions

There are another set of letters which apply in special circumstances. These are normally where an employee has two incomes

BR          All of your income is taxed at the basic rate - currently 20 per cent
D0          All of your income is taxed at the higher rate of tax - currently 40 per cent
NT          Is used when no tax is to be taken from your income or pension

You can find out more about tax codes one the HMRC website Tax codes - the basics