Tax codes show how much tax and National Insurance you’re supposed to pay each year. For most of you the basic tax code would be 1250L.
Breaking that code down, HMRC can tell that there are no special circumstances that apply (the “L” part), and that the taxpayer gets a standard tax-free Personal Allowance of £12,500 (the “1250” part, which you multiply by 10). That allowance means that they won’t be taxed until you earn more than this.
What happens if my tax code changes?
HMRC may tell your employer to use a higher tax code after you’ve claimed your tax refund because they assume you will be eligible for this tax relief next year – but you may not be.
A higher tax code means you can earn more money before you start paying tax, so you’ll pay less tax over the year. But your expenses are hardly ever the same two years running, so if you are due a tax refund and your claim is smaller, you won’t have paid enough tax and you’ll owe money to HMRC.
It is best to fix it straight away by contacting HMRC and informing them of a change in your tax code.