What your PAYE code means

You will normally be sent a notice of coding (form P2) by HMRC each tax year in January / February. Your employer is told your code number but not how it has been calculated. This is important because it means that the employer is not able to check if a code is correct. It is up to you to check that the code is correct!

The following information explains how tax codes work. For more information you may also want to read the HMRC pages on tax codes:

http://www.hmrc.gov.uk/incometax/tax-codes.htm

Most PAYE codes have a number followed by a letter.

• The number tells the employer how much tax free pay you are allowed.
• The letters also have a specific meaning (see below)
• Some codes consist of letters alone.
• Codes may also have ‘W1’ or ‘M1’ attached to the end; meaning the payroll should be used with the tax code stated, but on a week 1 or month 1 basis.

We will look at these in more detail below.

What the numbers mean

The number tells the employer how much tax free pay you are allowed (but please see special case for ‘K’ code below).  The last digit of your tax free pay is removed to create the code (so a £7,475 personal allowance becomes the digits 747 in the code).

For example, if your code number is 240, you are entitled to tax-free pay of £2,400. Therefore, you can earn £200 each month (£2,400 divided by 12 months) before any tax is deducted. Any pay above that will be taxed. Using the tax tables provided by HM Revenue and Customs, or an approved computer programme, your employer works out how much tax is due, takes it from your pay, and pays the rest to you. The tax is paid over to the Tax Office

What the letters mean

‘L’ refers to the normal personal allowance for those under 65.

‘P’ refers to the normal personal allowance for those 65 to 74.

‘Y’ refers to the normal personal allowance for those 75 or over.

‘T’ refers to circumstances where there are other items that require HMRC to look at your tax code, for example the income-related reduction to the Personal Allowance for those with income above £100,000.

The standard code (also called emergency code) – 747L

The 747L code means that you are entitled to the full tax free personal allowance for 2011/12 of £7,475. 747L is the right code for your main job in 2011/12, if you are under 65, don’t have any taxable benefits in kind from your employer (such as a company car or medical insurance) and have no untaxed sources of income or unpaid tax which is being collected through your PAYE code. And explanation of how this code is used is in the previous section.