UK Employee Tax Codes Explained: A HR's Guide

When it comes to payroll accuracy, getting your employees’ tax codes right is a fundamental detail, although, it’s not uncommon that an error occurs somewhere between HMRC and a payslip. Employers can be completely unaware that one of their employee tax codes is incorrect, until said employee comes to them confused as to why they’re being paid less than they should be.

Whether you manage payroll in-house or work alongside a payroll partner, understanding what these codes mean and how they affect take-home pay can make the difference between smooth payroll runs and a flurry of confused queries and frustration.

This guide breaks down how UK tax codes work, why they change, and what to do when they’re wrong, so you can manage payroll with clarity and confidence.

A tax code is a combination of numbers and letters issued by HMRC (HM Revenue & Customs). It tells employers how much Income Tax to deduct from an employee’s salary through the PAYE (Pay As You Earn) system. 

Each employee’s tax code is unique to their circumstances; it reflects factors such as their personal allowance, any company benefits, and whether they have multiple sources of income. In essence, a tax code is HMRC’s shorthand for an employee’s unique tax situation.

For example, if an employee earns a standard salary with no special tax adjustments, they’ll usually have a standard tax code like 1257L. But, if they receive a company car, pension income, or other taxable benefits, their code may differ to ensure the right tax is collected.

HMRC uses tax codes to ensure the correct amount of tax is deducted evenly throughout the year. Without them, employers would have no way of knowing how much of an employee’s earnings should be taxed or left tax-free.

From a HR perspective, understanding tax codes helps you:

• Identify and resolve payroll discrepancies early.
• Reassure employees who query their payslips.
• Maintain compliance with HMRC reporting requirements.
• Build employee trust in payroll accuracy.

Let’s break down what each part of a tax code actually means.

The numbers in a tax code usually show the employee’s annual tax-free personal allowance, which is the amount they can earn before paying Income Tax.

For the 2025/26 tax year, the standard personal allowance is £12,570. HMRC removes the final digit when forming a tax code, so £12,570 becomes 1257. In this scenario, if an employee’s tax code is 1257L, they can earn up to £12,570 before tax deductions begin. Any earnings beyond that are taxed at the relevant rate (20%, 40%, or 45%).

Sometimes the numbers change to account for adjustments such as:

• Untaxed benefits (e.g. company car or health insurance)
• Tax owed from a previous year
• Marriage allowance transfers
• Job expenses or charitable donations.

The letters in a tax code describe the specific conditions that apply to an employee’s situation.

Here’s a breakdown of the possible combinations:

Let’s say an employee has the code 1257L: 1257 means they’re entitled to £12,570 tax-free income. L shows they receive the standard personal allowance.

Now consider an employee with K250: K means they owe tax or have untaxed benefits exceeding their allowance. 250 means £2,500 must be added to their taxable income each year, so they pay extra tax to balance what’s owed.

Emergency tax codes are temporary placeholders used when HMRC hasn’t received enough information to assign the correct code.

These codes typically look like:

• 1257L W1 (week 1)
• 1257L M1 (month 1)
• 1257L X

They’re most common when an employee starts a new job without providing a P45. Sometimes they occur when HMRC hasn’t yet processed their previous employment details, or there’s a change in employment status or personal circumstances.

With emergency codes, tax is calculated on a week-by-week or month-by-month basis, ignoring cumulative earnings. Once HMRC receives the missing details, it issues the correct tax code, and payroll is adjusted automatically.

Tax codes can change at any time during the year, and often do. This is usually why errors occur, as an absent P45, or a delay/oversight in information provided to HMRC by another institution, will directly affect the tax code issued.

Common reasons for tax code changes include:

• Starting or leaving a job: A new role or additional income source requires HMRC to update an employee’s record.
• Receiving benefits in kind: Company cars, medical insurance, or other taxable perks reduce the tax-free allowance.
• Marriage allowance claims: Employees transferring or receiving allowances from a spouse.
• Changes in income: Promotions, bonuses, or new pensions can trigger an adjustment.
• Tax owed or refunded: HMRC may adjust the code to collect unpaid tax or return overpaid amounts.
• End of a tax year: Annual recalculations sometimes lead to new codes for the following year.

As a HR or finance professional, it’s worth reminding employees that tax code changes are normal and don’t always mean an error; often, they’re HMRC simply keeping things up to date.

To confirm an employee’s tax code, you can:

• Review it in your payroll software. It should reflect the latest information from HMRC.
• Check your PAYE Online for Employers account for P6 or P9 notices.
• Ask employees to verify their code in their Personal Tax Account at GOV.UK

Encourage employees to check their tax code at least once a year, particularly after job changes, benefit updates, or salary reviews. Early identification prevents future adjustments or refund delays.

If you or an employee believe a tax code is incorrect, the process to fix it is straightforward, but it must go through HMRC.

1. Check your payroll notifications – Make sure the latest P6/P9 notice has been applied correctly.
2. Ask the employee to contact HMRC – They can call or update their information via their Personal Tax Account.
3. Wait for HMRC’s correction – Once verified, HMRC issues an updated tax code electronically.
4. Apply the new code – Update it in your payroll system before your next run to ensure deductions are accurate.

It’s important not to manually alter tax codes in payroll software unless instructed by HMRC. Doing so can cause compliance issues or incorrect deductions.

For HR teams, tax codes can be a recurring challenge, especially when juggling payroll, compliance, and employee communications.

At Payroll Solution Services, we take the guesswork out of tax codes. Our experts stay up to date with HMRC regulations, manage code changes efficiently, and make sure every employee is paid correctly, every time.

We combine specialist knowledge with human service, so you can spend less time chasing codes and more time supporting your people. Let’s simplify payroll together.

Explore our affordable payroll services for large enterprise, payroll bureau, and Construction Industry Scheme (CIS), and contact us today to find out how we can make your payroll more accurate, compliant, and stress-free.