Tax Code 1257L - What Does It Mean?

Understanding your tax code is crucial to managing your finances effectively. In the UK, one common code you might encounter on your payslip is 1257L. 

This is the standard tax code, and it plays a vital role in determining how much income tax you are charged. It's directly linked to your personal allowance – the amount of income you can earn each year without paying tax.

‍What does the 1257L tax code mean?

The 1257L tax code signifies a specific personal allowance amount that HMRC (His Majesty's Revenue and Customs) has allocated for an individual. 

For the 2022/23 tax year, this allowance is set at £12,570. This means you can earn up to £12,570 in a year before you start paying income tax.

This allowance is distributed throughout the year, equating to £241 per week or £1,047 per month, ensuring a consistent and fair tax deduction across each pay period.

Let's take a standard salary of £25,000 with a 1257L tax code as an example. The first £12,570 is tax-free, and the remaining £12,430 falls into the basic tax rate of 20%, leading to a tax payment of approximately £2,486 annually.

For income that exceeds £12,570, the tax rate applied is 20%, applicable to earnings ranging from £12,571 to £50,270 for the 2023/24 tax year. Beyond this bracket, the tax rate escalates to 40% for incomes falling between £50,271 and £125,140. For those earning above £125,140, the tax rate peaks at 45%.

It's important to note that Scotland has its own set of tax rates, which may differ slightly from the ones mentioned here. See this article for an extensive guide on working out your tax.

‍What are tax codes? Why are they important?

Tax codes are HMRC's way of informing your employer how much tax to deduct from your pay. They are essential because they ensure you're paying the correct amount of tax. 

Not knowing your tax code can result in underpaying or overpaying tax. For example, if you start a new job, your employer will use your tax code to figure out your tax deductions.

Similarly, if you have multiple income sources, your tax code helps in allocating your personal allowance efficiently.

‍Different types of tax codes

Different employment situations or benefits might warrant different tax codes - like benefits and allowances.

‍Benefits 

For example, if you receive taxable company benefits like a company car, your tax code might be adjusted to account for the extra tax you owe on these benefits. 

As an illustration, consider a Marketing Manager who, besides their salary, receives a company car benefit valued at £5,000 annually. 

Additionally, they have a health club membership provided by their employer, worth £800 per year.

In this scenario, their tax code would be adjusted to 577L. This reflects a reduced personal tax-free allowance of £5,770. 

The calculation behind this new tax code would be: £12,570 (standard personal allowance) - £5,000 (car benefit) - £800 (health club membership) = £5,770.

Allowances

Or, various allowances can also influence your tax code, adjusting your tax-free personal allowance.

For instance, imagine a Graphic Designer who annually pays a professional subscription fee to the British Design Association, which we'll assume is £300 for this example.

Such professional subscriptions are considered allowable expenses by HMRC. Therefore, this £300 is added to the standard tax-free personal allowance. 

Consequently, the Graphic Designer’s tax-free allowance increases to £12,870 (£12,570 standard personal allowance + £300 professional subscription fee).

This adjusted allowance is reflected in their tax code, which would be modified to 1287L, indicating the increased tax-free amount.

For reference you can see the full list of different UK tax codes with a description of what each one means here.

How to check your tax code

You can find your tax code on your payslip, P45, or P60. It’s also listed in your Personal Tax Account on the HMRC website. Regularly reviewing your tax code is a good habit to ensure its accuracy.

‍When and why your tax code might change

HMRC updates tax codes annually, so it's helpful to keep track of these changes. For instance, the tax codes from the 2018/19 to the 2022/23 tax years have varied, reflecting changes in personal allowances and tax regulations.

If your code was 1250L in a previous year, for example, your personal allowance was £12,500. Understanding these figures helps you comprehend how much of your income is tax-free.

The previous years standard tax codes are/were:

Tax Year |  Code

2022/23 – 1257L

2021/22 – 1257L

2020/21 – 1250L

2019/20 – 1250L

2018/19 – 1185L

Various factors related to your employment and income can also necessitate a change to your tax code. They include:

• Job Changes: Starting a new job or having multiple jobs can alter your tax code.
• Income Sources: Having more than one source of income, like a job and a pension, affects your code.
• Taxable Benefits: Receiving benefits like a company car.
• Allowance Adjustments: Changes in tax-deductible allowances or benefits.

‍I think my tax code is wrong, what should I do?

While the 1257L code is typically accurate for most employees, especially those with a single job and no additional benefits or allowances, errors can occur. 

If you think your tax code is incorrect, it's important to act swiftly by contacting HMRC on 0300 200 3300. Incorrect codes can lead to either overpaying or underpaying tax.

Why is my tax code wrong?

Due to the high volume of tax codes to manage, it’s easy for HMRC’s system to make errors. Errors in tax codes can arise due to the changes listed above:

• Changes in employment status
• Multiple income sources
• Adjustments in tax-deductible allowances or benefits
• These scenarios can lead to HMRC assigning an incorrect code.

How to correct your tax code

Again, if you believe your tax code is wrong, contact HMRC. You can do this through your Personal Tax Account or by calling their helpline directly on 0300 200 3300. 

Provide accurate information about your income and any benefits or allowances you receive. HMRC will review your case and adjust your code if necessary.

Following the code

In conclusion, tax code 1257L symbolises a specific personal allowance set by HMRC. Understanding your tax code is pivotal in ensuring you’re paying the correct amount of tax. 

Regularly checking and understanding changes in your tax code can save you from potential financial discrepancies. If you find discrepancies, prompt communication with HMRC can rectify the issue, ensuring your tax affairs are in order. 

Using Crunch’s services will ensure that you’re kept aware of tax code notices that could affect you. Remember, staying informed about tax codes is not just a necessity, it’s a smart financial practice.