How do tax codes work?
In a nutshell, the tax code applied to your income will determine how it will be taxed and how much of it will be tax-free.
The numbers applied to your tax code correspond to how much tax-free income you’ll get within a tax year. You just need to multiply this number by 10.
The letters applied to tax codes work a little differently, as they refer to your situation and how it affects your Personal Allowance for the tax year. The letter L means you’ve been set to the standard tax-free Personal Allowance, the amount of which will depend on whether you’re on a basic or higher taxpayer rate.
You might also be applied an additional suffix like W1, M1 or X to your tax code 1257L - see below for more details.
What does tax code 1257L mean?
It's the most common tax code in the United Kingdom and is typically used for employees who have a single job and are entitled to the standard tax-free personal allowance.
Based on the above, with a 1257L tax code, the first £12,570 of an individual's income will be completely tax-free. Any income above this amount is subject to tax at the appropriate rates based on which taxpayer rate you’re on.
This tax cade is typically used for employees who only work one job and have no untaxed income or benefits.
Tax code 1257L M1
A tax code with an "M1" suffix, such as tax code 1257L M1, is used when your tax is calculated on a non-cumulative or "Month 1" basis.
This means that the tax calculation is performed independently for each month without considering the tax paid in previous months.
M1 is a type of emergency tax code, so it's only a temporary solution until HMRC receives enough information to issue the correct tax code. It might be applied in situations where you start a new job without a P45 from your previous employer, as an example.
Tax code 1257L W1
The tax code 1257L W1 is the weekly equivalent of the 1257L M1 tax code. The "W1" suffix signifies a "Week 1" or non-cumulative basis for weekly paid employees. The tax calculation is performed independently for each week, without considering the tax paid in previous weeks.
Like the M1 suffix, the W1 tax code is applied when there is a lack of information about your tax situation, or if you start a new job without a P45.
For more information on what the different tax code letters mean, head to HMRC's website.
How to calculate your take-home pay on a 1257L tax code
Take your annual income
Subtract your tax-free personal allowance
Apply the basic tax rate of 20% to the remaining income - this basic rate is only applied up to £50,270. Any income above £50,270 is taxed at 40%
If you earn more than £100,000 per year
Your personal allowance will go down by £1 for every £2 that your adjusted net income is above £100,000. So, if you earn over £125,140 your personal allowance will be 0 (gov.uk).
Are you due a tax rebate?
If you've paid more than you owe, because your tax code was incorrect or you were working multiple jobs and your personal allowance was split incorrectly, you may be due a tax rebate.
You can claim a tax refund through gov.uk.
Wrapping up
Understanding the meaning of tax codes like 1257L, 1257L M1, and 1257L W1 is crucial. It ensures that you're paying the right amount of tax.
It can also help you quickly identify any discrepancies and address them with your employer or HMRC.
If you're ever in doubt, it's always best to consult with a tax professional or contact HMRC to clarify your tax situation.
Image from Unsplash published by jakubzerdzicki
