Understanding Your Tax Code

A PAYE Tax Code is issued by HMRC to ensure that taxpayers pay the right amount of tax throughout the year. It is provided to an employer or pension provider who use it to calculate how much tax to deduct from salaries or pension payments before they are made.

The basic PAYE tax code for 2025/26 is 1257L. This gives the taxpayer a personal allowance of £12,570 for the year. This is the most common tax code for individuals with only one source of employment or pension income.

The default tax code for 2025/26 is 1257L. HMRC may instruct you to add 'W1', 'M1' or 'X' to the end of this tax code. This signifies that the code is not being applied cumulatively to the whole tax year, but instead is being applied to the current pay period only.

This could happen when:

• a new starter does not provide a P45 from their previous job,
• an employee changes employment and HMRC has not yet determined their correct tax position,
• pension income is received for the first time and HMRC are unsure of the overall tax situation for the taxpayer,
• an employee is moving to employment from self-employment and HMRC does not have the tax history for the whole year, or
• HMRC is reviewing a tax code due to changes in the circumstances of the taxpayer.

If HMRC request that 'OT' is used as the tax code, this means that the employee has no tax-free personal allowance applied. This could be because an employee has not given any starting information to their new employer, because they are a casual or temporary worker or because their total earnings are over £125,140, at which point the personal allowance is fully withdrawn.