Employee Tax Codes: A Director’s Guide for 2025
If you run payroll in house or you sign off the numbers each month, tax codes can feel like alphabet soup. Get them wrong and you risk unhappy staff, messy corrections, and HMRC headaches. This straight talking guide explains what the codes mean, how to handle new starters and updates, and the simple checks that keep your payroll accurate and compliant.
What is a tax code and why it matters
A tax code is HMRC’s instruction to you on how much Income Tax to deduct from an employee’s pay under PAYE.
The code tells your payroll system how much tax free pay to give and at what rate to tax the rest.
Most employees who are entitled to the full Personal Allowance will have a code based on that allowance. Many will see 1257L, which usually means the standard allowance and a cumulative calculation across the tax year.
Using the correct code protects take home pay, avoids year end surprises, and keeps you compliant.
Decoding common UK tax codes in plain English
L: The employee gets the standard Personal Allowance.
BR: All pay is taxed at the basic rate. Often used for second jobs or pensions where no allowance is given in that payroll.
0T: No Personal Allowance is given in this payroll. Used when HMRC has not confirmed details or when the allowance is fully used elsewhere.
K: The code is negative because the employee has underpaid tax or taxable benefits to collect. You add the K value to taxable pay before calculating tax. Do not deduct more than half of the employee’s gross pay in any pay period.
W1 or M1: Emergency markers for Week 1 or Month 1. The payroll calculates tax on a non cumulative basis until HMRC issues an updated code.
NT: No tax to be deducted from this source.
S or C prefixes: Scottish or Welsh taxpayer identifiers. Apply the relevant regional tax bands.
Onboarding new staff the right way
If a new starter has a recent P45, use the code and basis shown.
If there is no P45, follow this simple process.
Ask the employee to complete the HMRC Starter Checklist.
This tells you their employment situation and whether they have other jobs or pensions.
Use the checklist answers to select the correct starter declaration in your payroll software.
Your software will set the initial code, often 1257L with the W1 or M1 emergency marker.
Remove the W1 or M1 marker when HMRC sends a new cumulative code via RTI messages.
Keep evidence on file.
Retain the checklist and any correspondence with the employee. You can find the checklist here
Handling tax code notices from HMRC
HMRC sends code change notices electronically to your payroll software. You may also receive P9 or P6 notices.
Apply the new code from the date shown. Do not backdate unless the notice instructs you to.
Do not edit codes based on employee requests. If an employee disputes a code, ask them to contact HMRC or check their Personal Tax Account. You must operate the code HMRC has issued.
For mid year changes, ensure the basis is correct. If it is cumulative, the software will automatically spread adjustments over the remaining pay periods.
Quick accuracy checklist for every payroll run
Before payday
Import and apply any new HMRC tax code notifications.
Check that emergency markers W1 or M1 have been removed where a cumulative code has arrived.
Review any K codes. Confirm that total deductions do not exceed 50 percent of gross pay.
For new starters
P45 received and code applied, or Starter Checklist completed and the software set to the right declaration.
For leavers
Issue a P45 promptly and ensure the final tax calculation uses the correct code and basis.
At year end
Issue P60s to all employees who were on payroll at 5 April.
Keep payroll records for at least three complete tax years.
Common questions directors ask
My employee says their tax code is wrong. What do I do?
Operate the code you have. Ask the employee to check their Personal Tax Account or call HMRC to update their details. HMRC will send you a new code if needed.
Why has HMRC changed the code mid year?
Common reasons include benefits in kind being coded in, adjustments for underpaid tax from a previous year, changes to employment or pension income, or updates to residency that apply Scottish or Welsh bands.
When should I use BR or 0T?
Use BR only if HMRC instructs you or where it is appropriate for a secondary employment with no allowance allocated. 0T is used where there is not enough information to give an allowance or HMRC has told you to use it.
How do K codes work?
The K number represents extra taxable pay to recover underpaid tax or benefits. For example, K300 adds 3,000 to the annual taxable pay. Remember the 50 percent cap on total deductions in a pay period.
What is the difference between cumulative and W1 or M1?
Cumulative looks at pay and tax from the start of the tax year and smooths out the position. W1 or M1 calculates tax on that period’s pay only and is meant to be temporary until HMRC issues a cumulative code.
Practical tips to stay compliant and save time
Use reliable payroll software that automatically imports HMRC code changes via RTI.
Set a pre payday control step to review any code changes and unusual results, such as very high tax or negative allowances.
Keep clean employee records. Full names, addresses, dates of birth, and National Insurance numbers help HMRC match records quickly.
Educate your team. A short new starter checklist routine stops most emergency code issues.
Reconcile monthly. Compare gross to net reports against RTI submissions to spot anomalies early.
Director’s responsibilities at a glance
Operate PAYE and apply HMRC tax codes.
Submit Full Payment Submissions on or before payday.
Keep payroll records and issue statutory forms on time.
Signpost employees to HMRC for code disputes while you operate the latest notice received.
Ready to take tax codes off your to do list
Managing payroll and tax codes can be a time consuming distraction from growing your business. Book a no obligation call with J Benn Finance to see how our expert payroll service keeps your team paid correctly, your records compliant, and your time free for what matters - HERE
