Employee tax codes and National Insurance

If you receive a P2 PAYE notice of coding from HMRC, you should check it at once to see that it is correct. If it you are unsure, you should ask HM Revenue and Customs for an explanation of your coding. You may receive a number of coding notices – one for each source of income you have which is taxed under PAYE.

Complications with PAYE tax codes can include:

  • Taxable state benefits (estimates of which may be deducted from your tax free income)
  • Benefits in kind – such as company cars – which reduce your tax free income
  • Underpayments of tax and National Insurance in previous years, or other amounts owing to HMRC, which may be included in your code
  • Work expenses or flat rate deductions – see employee expenses page for details

Tax codes for pensioners can be complex, as they may include adjustments for state pension, multiple small pensions or cover both employment and pension income.

If you live in Scotland, your PAYE code should have an ‘S’ prefix to show that you are a Scottish taxpayer.

The standard tax code for a main job in the tax year 2021-22  is 1257L. A second job should normally have a BR (basic rate) code. If your code is not a standard code, you need to know why.

Notices of coding are usually sent out in about February/March for the coming tax year. You should check your notice of coding and keep it. You may need it to check if your employer is deducting the right amount of tax when the new tax year starts in April. As with all paperwork relating to taxes, it’s best to keep it for at least six years in case there are problems and you want to refer back to it at a later date.

If the coding notice is wrong, you will pay the wrong amount of tax – and you are likely to have to pay back any underpayment of tax.

There is information about checking your tax code on the Gov.uk website at https://www.gov.uk/tax-codes/what-your-paye-coding-notice-means

If you think your tax code is incorrect, you should contact HMRC   on 0300 200 3300.

If you are unable to resolve the position with HMRC, and you are on low income, you may contact TaxAid for help to resolve the situation.

Mistakes in operating PAYE

If you have not paid enough tax and think there may have been a mistake by your employer or pension provider then you can ask HMRC to consider collecting the tax owed from your employer or pension provider rather than from you. You will need to show HMRC that it is likely that the employer made an error, and they should then investigate the position further.  If the employer can show that they made no error, or acted in good faith, then HMRC will pursue you for the underpaid tax.  There is guidance on this, including what may constitute an ‘employer error’ on the HMRC website at http://www.hmrc.gov.uk/manuals/pommanual/paye95011.htm.

HM Revenue and Customs may also give up tax due under Extra Statutory Concession A19 (ESC A19).  This is if the underpayment has arisen because HMRC has had the information necessary for them to identify and correct the problem, but they failed to do so. They will consider this, but only where:

  • there have been delays in them acting on the information (HMRC considers a delay of 12 months from the end of the tax year in which it received the information to be reasonable) and
  • you could reasonably have thought your tax position was correct

With regard this last point, HMRC expects you to have checked your PAYE tax code when it is received. If you didn’t understand the code, HMRC expects you to have contacted the tax office for an explanation.  It can be difficult to claim ESC A19 for all but exceptional circumstances.

There is more information about ESC A19 on the HMRC website at http://www.hmrc.gov.uk/manuals/pommanual/PAYE95000.htm.

See also the TaxAid website tax debt guide page on underpaid PAYE