What your PAYE code means – continued
Employee tax codes and National Insurance
Changes to codes
The number part of the code can be adjusted to collect the tax due on other income you have. This can be done to avoid the need for a self assessment tax return and / or a tax bill at the end of the year.
HM Revenue and Customs uses code adjustments to collect tax due on other untaxed income (on, for example, employment related benefits in kind, state pension, taxable state benefits and small amounts of rental income), by taxing your earnings or non-state pension at a higher rate. Tax codes can also be adjusted to collect other amounts owing to HMRC, such as self assessment tax, tax credit underpayments and class 2 National Insurance debts.
The starting point for the code will be your tax free personal allowance – the ‘standard code’ is 1100L 2016-17 ( 1060L in 2015-16). This will then be adjusted to the extent that you have other earnings from employment, taxable benefits in kind, or pensions or taxable state benefits on which tax is owing.
For example, your employer may provide you with medical insurance costing £1,000. This is part of your overall remuneration from the employer, but it is not paid to you, it is paid to someone else on your behalf. (Payments like this are called ‘benefits in kind’).
To collect the tax due on this taxable ‘benefit in kind’ , HMRC reduces the tax free pay allowed against your pay by £1,000. For the year 2016-17, if you are entitled to the £11,000 personal allowance this will be achieved by changing your code from 1100L to 1000L – to represent a reduction in the free pay available to cover your pay from £11,000 to £10,000. The balance of £1,000 of free pay is held back to cover the £1,000 of taxable medical benefits.
If your code has been adjusted and you do not know why, you should contact HMRC to check the tax code.
K codes are different from all other codes, in that they tell the employer to use a negative tax free amount. If your code is adjusted to take account of other income, taxable benefits in kind or amounts owing to HMRC, but you do not have enough tax free personal allowance to cover all these adjustments, then you will be issued with a K code.
Where other codes show an amount of tax free pay, so the higher the number part of the code, the more tax free pay you get; K codes show an additional taxable amount added to your income. This means that the higher the number part of the K code, the more tax will you pay.
It is essential to check K codes individually as they may be the result of a number of adjustments, and there is no standard answer.
For example, your employer provides you with various benefits in kind and the adjustment needed is £9,000. In addition, you owe HMRC underpaid tax from previous years of £2,500. This is £500 more than your tax free personal allowance of £11,000. To collect this additional tax, HMRC can issue a K50 tax code. You will then have no tax free allowance to set off against your pay, and will be taxed as though you had an extra £500 of taxable income.
Unlike the other codes (where the letter is at the end of the code), the ‘K’ in the K code is placed in front of the numbers. This helps the employer easily identify this special type of code. The amount of tax deducted using a K code should never exceed 50% of your gross pay for that payday. This rule also applies to other tax codes, but is most likely to apply with K codes.
Letter only codes
There are some codes that are just letters. For example:
- The NT code means that no tax should be deducted. It is rare and used only in exceptional circumstances. This may be because the employee lives overseas or was made bankrupt during the tax year
- The BR code is more common and means that you will be taxed at the basic rate ( 20%) on your total pay from this employment or pension. It is usually used for a second job. It assumes that your main job will have used up all the tax free pay to which you are entitled (your personal allowance) and so none remains to claim against this second employment or pension. However it is not appropriate if, for example:
- Your earnings from your main job are less that your basic tax free pay
- You are a higher rate tax payer and should be paying 40% tax (or more) on your second job (rather than 20%).
- The DO code means that you will pay higher rate (40%) tax against all the income from this employment
- The D1 code means that you will pay additional rate (45%) tax against all the income from this employment
Week 1 or month 1 codes
Week 1 and month 1 codes are described in detail on the Tax Codes for New Employees page. They can be applied as an ’emergency code’ for a new job.
HMRC may also issue you with a week 1 or month 1 code if it makes a very large change to your tax code during the year. Using a Week 1 or Month 1 code reduces the impact of the change – so that most of your pay for that pay-day does not disappear in tax. But this will also mean that the adjustment is likely to continue into the following tax year.
There are a number of reasons why HMRC might change your tax code during the year. For example, your circumstances may have changed – a new taxable benefit in kind, some untaxed income or state benefit, or an error earlier in the year.