United Kingdom
Make employment in the United Kingdom easy. Let us handle payroll, benefits, taxes and compliance. Benefit from a personalised service, and direct contact with our expert team.
UK Tax Codes explained
UK Tax Codes Explained for International Employers
If you are hiring in the UK, you need to understand tax codes. Every employee in the United Kingdom has a tax code assigned by HMRC. This code tells your payroll system how much Income Tax to deduct through PAYE. Get it wrong and your employees pay too much or too little tax, and you face HMRC queries.
This guide breaks down what UK tax codes mean, how to read the letters and numbers, what emergency codes are, and how an Employer of Record handles the whole process for international companies.
What Is a UK Tax Code and Why Does It Matter?
A UK tax code is a short alphanumeric string, usually four or five characters, that HMRC assigns to every taxpayer. It tells employers and pension providers how much tax-free income an employee can earn in a given tax year. The employer uses this code in their payroll software to calculate deductions through the PAYE system.
The most common code for the 2025/26 and 2026/27 tax years is 1257L. The number 1257 represents the Personal Allowance of £12,570 (multiplied by 10). The letter L indicates the standard tax-free allowance.
If an employee has the wrong code, they either overpay tax throughout the year or build up a debt to HMRC. Either way, it creates payroll problems and unhappy staff.
For international employers, tax codes are especially important because you may not have a UK payroll team familiar with HMRC processes. An Employer of Record manages this on your behalf, but you still need to understand the basics.
What Are the Most Common UK Tax Codes?
The default code for most employees with a single job and no untaxed income. It gives the full Personal Allowance of £12,570.
Used when all income from a particular job is taxed at 20%. This usually applies to a second job where the Personal Allowance is already used by the primary employer.
D0 taxes all income at 40% (Higher Rate). D1 taxes at 45% (Additional Rate). These appear when an employee has multiple jobs and the combined income pushes them into a higher band.
No Personal Allowance. This might apply when an employee has used up their allowance elsewhere or has not provided a P45. It can also be used on a cumulative basis or as an emergency code.
A K code means the employee's taxable benefits (like a company car) exceed their Personal Allowance. The code tells payroll to add extra tax rather than subtract it. For example, K475 means £4,750 of additional taxable income above the allowance.
No tax is deducted. This is rare and usually applies to specific situations such as certain non-resident employees or double taxation agreements.
What Is an Emergency Tax Code and How Does It Happen?
Emergency tax codes are applied when HMRC does not have enough information about an employee's income. The most common triggers are:
- Starting a new job without a P45 from a previous employer
- Starting the first job after a period of unemployment
- Moving from self-employment to employment
- A change in circumstances that HMRC has not processed yet
When someone is on an emergency code (W1 or M1), their tax is calculated as if they earn the same amount every pay period. This means they do not get the benefit of unused Personal Allowance from earlier in the tax year.
Emergency codes are usually temporary. HMRC updates the code once they receive the correct information, typically through the employer's RTI (Real Time Information) submissions. The employee can also contact HMRC directly to speed things up.
For international employers, emergency codes are common when you hire your first UK employee. Without a UK payroll history, HMRC may default to an emergency code until the first Full Payment Submission goes through.
How Does an EOR Handle Tax Codes for UK Employees?
When you use an Employer of Record to hire in the UK, the EOR becomes the legal employer for payroll purposes. This means the EOR:
- Registers as the employer with HMRC and receives a PAYE reference number
- Collects starter information from the employee (P45 or starter declaration)
- Applies the correct tax code based on what HMRC provides
- Runs payroll through RTI — submitting FPS and EPS reports to HMRC each pay period
- Updates tax codes when HMRC issues new coding notices (P6/P9)
- Handles emergency codes and resolves them with HMRC on your behalf
The EOR removes the need for you to set up a UK payroll system or hire a UK accountant. You get compliant payroll from day one, with correct tax deductions and timely HMRC filings.
This is especially valuable if you are hiring a single employee in the UK. Setting up your own payroll for one person is costly and time-consuming. An EOR handles it as part of their core service.
What Happens If You Use the Wrong Tax Code?
Using the wrong tax code creates problems for both the employer and the employee.
The employee pays too little tax during the year. HMRC will recover the shortfall, usually by adjusting the tax code for the following year. The employee may receive an unexpected tax bill.
The employee pays too much tax. They are entitled to a refund, but it may take months to process. In the meantime, their take-home pay is lower than it should be.
If HMRC spots an error, they issue a new tax code (P6) to the employer. The employer must apply it in the next pay run. Failure to act on HMRC notices can result in penalties.
HMRC runs P800 calculations after the tax year ends to check whether employees have paid the right amount. If there is a discrepancy, the employee either owes tax or receives a refund.
For employers, the main risk is reputational. Employees trust their employer to get payroll right. Repeated errors damage that trust and can lead to grievances or tribunal claims.
How Often Do Tax Codes Change and Who Updates Them?
Tax codes can change at any point during the tax year. HMRC issues coding notices when:
- An employee's Personal Allowance changes (income over £100,000 reduces it)
- Benefits in kind are reported (company car, medical insurance)
- An employee starts or stops a second job
- An employee claims marriage allowance
- HMRC receives information about untaxed income
Annual coding: Each January, HMRC sends employers new tax codes for the upcoming tax year (starting 6 April). Employers must apply these codes from the first pay run in the new tax year.
Mid-year changes: HMRC can issue P6 notices at any time. Employers must apply the new code from the date specified, usually the next available pay period.
Employer obligations: You must act on HMRC coding notices promptly. You cannot choose to ignore a new code or apply a code you think is more appropriate. The tax code is HMRC's instruction, not a suggestion.
An EOR like Agility manages all of this automatically. When HMRC issues a new code, the EOR applies it in the next payroll cycle and notifies the employee. You do not need to intervene.
Agility EOR is far more than just a service provider. We’re flexible, innovative and focused on outstanding client service. Supporting you every step of the way – and valuing your people as the cornerstone of success.
Frequently Asked Questions
1257L is the standard UK tax code for the 2025/26 and 2026/27 tax years. The number 1257 means the employee can earn £12,570 before paying Income Tax. The letter L means they receive the standard Personal Allowance.
No. Tax codes are set by HMRC, not by the employer. If an employee thinks their code is wrong, they should contact HMRC directly. The employer must apply whatever code HMRC provides.
Both are emergency, non-cumulative codes. W1 (week 1) is used for weekly-paid employees. M1 (month 1) is used for monthly-paid employees. Tax is calculated on each pay period in isolation rather than cumulatively from the start of the tax year.
The EOR registers with HMRC as the employer, collects the employee's starter information, applies the initial tax code (often an emergency code), and submits RTI reports. HMRC then issues the correct code, which the EOR applies in the next pay run.
No. Tax codes only affect Income Tax deductions. National Insurance Contributions (NICs) are calculated based on earnings thresholds and have their own rates. The tax code has no impact on NICs.
Next Steps
Understanding UK tax codes is just one part of compliant UK payroll. If you are expanding into the UK and want payroll, tax, and employment law handled for you, Agility EOR can help.
Talk to Agility EOR about hiring in the UK