PAYE tax codes

If you are an employee then your employer must operate PAYE (which stands for Pay As You Earn). This means that your tax (National Insurance and Income Tax) is deducted from each of your wages payments before you receive them. This is done automatically and so, you do not normally need to complete a tax return.

PAYE is simply a method used to pay tax. It does not guarantee that the amount deducted is perfectly correct. In fact, approximately 15% of PAYE taxpayers are likely to pay the incorrect amount of tax each year. Because of this, the key to paying the right tax is to check the tax code your employer uses for you. If you don’t do this you could be overpaying or underpaying your tax, and could find yourself losing out on a tax refund or facing a sudden tax bill.

If you think your tax code is wrong you should contact HMRC. You can do this on the Income Tax Helpline 0300 200 3300 (or via the HMRC contact us page).

How to Find your current Tax Code

Find out which tax code you are on. You can find this:

On your payslip
On letters or emails from HMRC
By checking your tax code on HMRC’s website and signing up to view your personal tax account here: https://www.gov.uk/check-income-tax-current-year
By contacting HMRC: https://www.gov.uk/government/organisations/hm-revenue-customs/contact/income-tax-enquiries-for-individuals-pensioners-and-employees

Where your PAYE tax code comes from

The PAYE code will either be calculated and issued by HMRC to you and your employer, or your employer will use a standard code that is set out for them by rules set by HMRC.

If you change jobs, your new employer should normally use the same code as your previous employer. This should be taken from your P45.

If you do not have a P45, then the employer will use the starter checklist (https://www.gov.uk/guidance/starter-checklist-for-paye) to figure out your PAYE code. Your employer will ask you questions to answer the starter checklist and determine your tax code.

Almost all employers will now be operating PAYE in Real Time. Under Real Time PAYE Information (RTI) employers report pay and tax details to HMRC each time you are paid.

PAYE codes and what they mean

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.

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 £12,570 personal allowance becomes the digits 1257 in the code).

For example, if your code number is 1257, you are entitled to tax-free pay of £12,570. Therefore, you can earn £1,047 each month (£12,570 divided by 12 months) before any income tax is deducted. Any pay above that will be taxed. 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 HMRC.

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.

What the letters mean

Common tax codes are listed below. Most people will be entitled to the personal allowance, as it is the amount that you can earn per year that is not taxed, so the most common tax code is the first one on the list. But check the others listed to help you understand your code if it is different.

L: The L in your tax code reflects that you are entitled to the basic ‘personal allowance’ for tax. 1257L is the most common tax code, it reflects that you have a personal allowance threshold of £12,570 (in 2022/23), which is the amount you earn before you are taxed. This usually changes after 5th April each year.
M: This means you’re receiving 10% of your partner’s personal allowance
N: This means that you have transferred 10% of your personal allowance to your partner
S: This means your tax is calculated at Scottish rates
C: This means your tax is calculated at Welsh rates
BR: This means all of your income from your job or pension is taxed at the basic rate, which is 20%. You may be placed onto this as an ‘emergency tax code’ if you have changed jobs.
D0: This is similar to BR and means you do not get any allowances but instead to tax everything at 40%
W1, M1 or X codes: These are emergency codes, that may mean you need to contact HMRC
K: This means that you have income that is not being taxed (e.g. state pension, benefits, etc) and this is worth more than your tax free personal allowance. K codes can also be used to collect previous years’ tax liabilities. If the amount of tax being deducted in this way is causing you financial hardship, contact HMRC.
T: This means that there are items in your code that HMRC need to review each year, so that you receive a new tax code at the start of the year rather than rolling forward the old one.
NT: This means that no tax should be deducted. It is rare and used only in exceptional circumstances
There are still other tax codes, and if you are unsure of what yours represents then do contact HMRC, or TaxAid for additional support.

Usually, you won’t need to do anything about your tax code, but if you don’t understand it you need to take action to make sure the right tax is paid during the year and you don’t get an unexpected bill.

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 Week One, or 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 check with your employer and contact HMRC. If you are still on this code at the end of the tax year, you should contact HMRC.

Complications with PAYE tax codes

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.

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 any underpayment of tax, or receive a refund of any overpayment.

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 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