PLEASE NOTE: The charity TaxAid advises only those people on low incomes whose problems cannot be resolved with HMRC.

Understanding your tax code

Tax Guide for Employees guide

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Introduction
As an employee, you need to understand and check your PAYE tax codes. HMRC expects you to do this. If you don’t check your tax code, you could face an unexpected tax bill, be paying too much tax now, or miss out on refunds from earlier years.

Information
About 15% of PAYE taxpayers are likely to pay an incorrect amount of tax over the tax year. HMRC double checks the position at the end of each tax year and sends out a P800 tax calculation to any employee who appears to have paid the wrong amount of tax.

What you need to know
The standard tax codes – 1100L and BR
The standard PAYE tax code for your main job in 2016-17 is 1100L (2015/16 – 1060L). It represents £11,000 of tax-free income.

For a second or subsequent job the standard code is BR – Basic Rate, a 20% deduction. There are some circumstances in which these codes will not result in the correct deduction of tax over the tax year. This is considered in the ‘what might go wrong?’ section below.

The 1100L code is usually applied on a cumulative basis. This means that your tax position is recalculated each pay day using total pay to date and free-pay to date during the tax year. As a result, variations in income between months are averaged out. On a 1100L cumulative code, the tax you pay on your main job should be correct, so long as you earn at least £11,000 in your main job, or, if you earn less than £11,000 in the year, this is your only taxable income.

If you have a state pension
There are no standard codes for people with a state pension. Your code will be affected by any state pension you have as well as any occupational pension.

Month one and week one codes
If you start work as an employee part-way through a tax year, you may initially be put on a 1100L Week One, or 1100L Month One code. This may not be clear from your payslips or PAYE coding notice. This code will not always produce the correct answer. If you think you may be on a Week One or Month One tax code, you should ask your employer and contact HMRC. If you are still on this code at the end of the tax year, you should contact HMRC.

What might go wrong?
There are a number of circumstances in which the standard combination of 1100L code on a main job and BR code on any subsequent job may not work. These include:

1) If you earn less than £11,000 in your main job (in 2016-17) and have more than one job
Example:
Freda has two jobs. In her first job she earns £8,000, and in her second job she earns £4,000. Overall she is due to pay tax on £12,000 of income. But, the standard codes of 1100L for the main job and BR for the second job mean that she would pay too much tax during the year.

This is because she is earning less that £11,000 in her main job. The main job has £11,000 of tax-free pay allocated to it, but she can only use £8,000 of this. This means that £3,000 (£11,000 – 8,000) of her tax free pay is unused.

Freda can either wait until the end of the tax year and ask for a refund, or ask HMRC to divide her tax-free pay between jobs. If Freda decides to split the tax-free pay between jobs, then she needs to take care that the split is optimal throughout the year and to check that no mistakes are made when the codes are adjusted.

2) You have untaxed income as well as your main job
Example:

Derek has a job as an employee earning £14,000 a year. He also has rental income of £8,000 a year, less expenses of £5,600 – a rental profit of £2,400.

Derek can avoid being in self-assessment by asking HMRC to adjust his tax code to collect the tax due on his rental income. This would mean that his tax code number would be lower than the standard 1100L, at 860L as £2,400 of his tax-free pay is used to cover the rental income.

3) You have high earnings split between two or more jobs
Example:
Jason works in the health service. In addition to his main job, he is ‘on-call’ for additional work. In his main job he earns £41,000 pa. His additional part-time work earns another £4,000.

The standard code of 1100L for the main job, and BR for the second job mean Jason will pay too little tax and face a bill at the end of the tax year.

Jason could earn £43,000 (£11,000 personal allowance plus £32,000 basic rate band) before he paid 40% tax in his main job. He already earns £41,000 in his main job, so he can only earn another £2,000 before he is due to pay 40% tax. But the standard BR code on his second job would only deduct 20% tax.

Jason needs to ask HMRC to change his tax code (to a D0 code) so that 40% tax is taken from his second job. The D0 code would mean that he will pay slightly too much tax (about £400 over the year – which should be refunded later). But this is perhaps preferable to facing a bill of about £400 if the tax code is not changed before the end of the tax year.

4) You have work expenses to claim as an employee
If you have incurred work expenses up to £2,500 that are not reimbursed by your employer, or you are due a standard expenses allowance, then you will have an addition to your tax code. Your code number will be higher than the standard 1100L. See the employee expenses section on left hand menu for details.

What action should I take?
For general queries, see the information on Gov.uk designed to help you check your tax code at https://www.gov.uk/tax-codes/numbers-in-your-tax-code-what-they-mean .

If this does not resolve the problem, you should phone HMRC on 0300 200 3300. Have your National Insurance number and payslip to hand.

If you have tried to resolve the position unsuccessfully with HMRC, and are on low income, you may contact the TaxAid helpline

Further information
There is information on how tax codes are worked out for pensioners and employees on the TaxAid website at:
Employee tax codes and National Insurance
Your personal allowance