Understanding tax codes – a guide for business owners
Tax codes – the basics
Tax codes can seem confusing, especially if you’ve never managed your business’ accounts before or are new to running your business. But whilst they can be tricky to get you head around, they’re vital for running your business and payroll compliantly and efficiently. So, whether you’re paying yourself through PAYE or managing a team, using the correct tax codes will ensure that everyone pays the correct amount of tax.
In this blog we explore some of the most used ones, to help you understand which are relevant to you.
What is a tax code?
A tax code is what communicates to an employer and pension provider how much income tax they need to deduct from an individual’s wages or pension. Every person’s tax code is issued by HMRC and typically changes every year, or if a person’s financial situation changes.
Common tax codes and their meanings
1257L – The Standard Tax Code (2025/26)
What it means: The employee is entitled to the full personal allowance of £12,570
Who’s it for: Most UK taxpayers with a single income source
Business tip: If your employees use this tax code, deduct their tax after their personal allowance
BR – Basic Rate Tax Code
What it means: All income is taxed at 20%, and no personal allowance is given
Who’s it for: People with a second job or a pension
Business tip: If you are the employee’s second employer, you’ll need to apply 20% tax to all their earnings
D0 and D1 – Higher Rate Codes
D0: Tax all income at 40%
D1: Tax all income at 45%
Business tip: These tax codes override personal allowances. Ensure you apply the specified rate on all earnings
K Codes – Negative Personal Allowance
What it means: Your employee owes tax or receives taxable benefits (such as a company car)
Example: K500 means you’ll need to add £5,000 to a taxable income before applying tax
Business tip: Always double-check with your Vantage Client Director to ensure you’re processing K codes correctly, as they are inherently more complex
0T – No Personal Allowance
What it means: The tax is applied without any allowance at all
Who gets it: Employees that are missing details, or are starting a new job without a P45
Business tip: This tax code is only to be used temporarily until HMRC provides you with the correct tax code
Emergency Tax Codes (ie 1257L W1 / M1 / X)
What it means: Temporary tax codes are based on weekly or monthly earnings only
Who gets it: New employees or those who do not have a full income history
Business tip: HMRC will usually update the employee’s code automatically. Be sure to check your employees submit their P45 or starter checklist promptly to avoid any delays
How to check a tax code or update one
If you have reason to believe that one of your employee’s tax codes is incorrect, or they do, you’ll need to:
- Visit the HMRC Personal Tax Account
- Contact HMRC directly
- Wait for HMRC to issue a P6 or P9 notice before applying any updates within payroll
Important – As an employer you must not change an employee’s tax code unless HMRC instructs you to do so
Why do tax codes matter for business owners?
By ensuring you’re using the correct tax codes, your business benefits by:
- Staying compliant with HMRC regulations
- Can avoid fines or backdated payments
- Keeping your employee’s pay accurate
- Maintain a smooth and predictable payroll operation
If you’re considering outsourcing your payroll ensure to speak to your Vantage Client Director, who can assist you. Take a look at our payroll service today to see if it’s something that could help you, and take the extra hassle out of running your business.
As a business owner it’s vital to understand the codes being applied, regardless of whether you manage your payroll inhouse or outsource it. Mistakes can lead to unhappy employees and potential financial penalties.
Final thoughts – stay on top of your tax responsibilities
Understanding what the different tax codes mean and how they’re used isn’t just for accountants. As a business owner, understanding them is all part and parcel of responsible business management.
From the standard 1257L to the more complex k codes, every code will affect how much is deducted from an employee’s pay. Stay informed, review tax codes regularly, and consult a payroll specialist such as your team here at Vantage whenever needed.
For specific tailored advice and ongoing support speak to your Vantage Client Director, who will be able to advise you on the level of support you need based on your business requirements.
Note: All the information and advice in this blog post was correct at the time of writing.
