London is neatly divided into different areas - the city centre and then radiating out from there are postcodes starting with N(orth), E(ast), and W(est). There are further breakdowns such as NW, SW, SE.
Here's a postcode I made up:
N1 refers to the area just north of the city. Strangely enough, these postal code areas don't seem to align with boroughs (think 'groups of suburbs' in Sydney speak). For example in the area in which I live (Angel), most of the suburb has a postcode starting with N1. However there is a part of the suburb towards the southern end that uses the city postcode EC1. I'll discuss city postcodes later.
There is then a space to indicate a break between the general area and the more specific area.
The letters after the space seem to be a random combination of letters and numbers that literally identifies the street in N1. In London all you need to do is know the street number (let's say 12) and the postcode N1 8JK and it's possible to find out exactly which building it is. Oh but of course there are exceptions. One street (depending on the length) might have a number of different postcodes.
Because postcodes are so specific, there is no need to list your 'suburb' or 'borough' on your address. London addresses commonly look like this:
Mrs Jane Doe
Flat 8, Amber Court,
London N1 8JK
I expected the city postcodes to start with C. Instead, they are broken down into EC (East Central) and WC (West Central). There is no C (Central).
Apparently these guys go through intense training and have to sit multiple exams in order to work as a cab driver. They are tested on the aforementioned postcodes. Cab drivers will know from memory, exactly where to take you if you say '10 N1 8JK'. Insane.
Outside London metro
As you can see from the diagram above, once you leave the London metropolitan area the postcode prefixes become less neat and orderly. They do, however, stand for what the area is called. For example above N is the postcode EN which stands for Enfield which is the area just outside London metro to the north.