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It's a complicated affair but not really that bad. Every UK postcode format consists of two halves, an "Outward" and an "Inward". These two halves allow anyone at the sorting office to quickly route any item going through any sorting office. First off the Outward and Inward halves of any postcode format are separated by a space.
The Outward half of a Postcode consists of one or two alpha characters (Postcode Areas) followed by one of two numeric characters (Postcode Districts).
There is just one exception to the rule; London being heavily populated has had to introduce a Suffix code (SW1X) which is an alpha character. So these London postcodes will have an extra digit and look like "SW1A 2AA".
If you imagine hundreds of regional sorting offices throughout the UK and each sorting office has its' own unique "Outward" code which corresponds to the first part of a postcode format (a space separates the Outward and Inward halves):
The point of this is so post office workers can quickly look at the first part of any postcode format and put the letter or package into a labeled "bin" that is later to be delivered to the appropriate sorting office responsible for that area; Birmingham's sorting office, Uxbridge's sorting office etc.
When the post reaches the "Outward" destination, the postal workers at the sorting office will look at the second part of the "Outward" postcode format - the "Postcode District", which is simply the numbers that immediately follow the first one or two letters of the postcode:
These numbers tell the post office worker which sub delivery office is responsible for the delivery of that item. I.e. each sub postal office will look after its own area and be responsible for collection and delivery to the businesses and residential addresses for that district. For larger sorting offices this is normally all under one roof and floor space is partitioned into into districts representing what would have been the sub delivery office back in the old days.
The Inward half of the postcode format (easily identified as appearing after the space in any postcode) consists of just one numeric followed by two alpha characters.
Postcode Areas - The largest geographical unit of the postcode. Each one comprises one or two alpha characters generally chosen to be a mnemonic of the area e.g. B for Birmingham, CF for Cardiff. There are 124 Postcode areas including the Channel Islands and IOM but excluding Falklands and other armed forces postcodes.
Postcode Districts - Each postcode area is divided into a number of districts which are represented by the first one or two numbers immediately following the Postcode Area. These numbers range from 0 to 99 e.g. B42. In London a further alpha character is used to divide some London districts into sub divisions (suffixes) e.g. EC1A.
Postcode Sectors - Sectors are numbered 0-9. It should be noted that when sorting postcodes into order, sector 0 is the tenth sector rather than the first!
If you would like a FREE Excel file containing every postcode Area and District in the UK then visit - postcode format.