PAYE and tax codes

Employee tax codes and National Insurance

If you are an employee then your employer must operate PAYE (which stands for Pay As You Earn). This is a way of collecting your income tax and National Insurance from your pay as you go along, instead of sending an annual tax return and sorting out your own tax directly with HMRC.

Tax is deducted each pay day from your pay before you receive it and by the end of the tax year, you should have paid the right amount of tax. Sometimes there are mistakes and you may pay too much or too little tax.

PAYE is only a method of collecting tax. If there are any errors and the wrong amount of tax is collected, you, the employee, are usually liable to pay any unpaid tax. This is one reason for taking time to understand how PAYE works – you are more likely to spot errors and avoid underpaying or overpaying tax.

The key to paying the right tax as an employee is having the right PAYE tax code so it is important to check that the tax code your employer uses is the right one for you. 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).

Where your PAYE tax code comes from

The PAYE code used by the employer may come from a number of different places:  they will either be calculated and issued by HMRC or the employer will use a standard code according to rules set out for them by HMRC.

If you change jobs, the new employer should normally use the same code as your previous employer. If you have come from a previous employment (or received a taxable state benefit), your old employer (or the DWP) should give you a form P45 to give to your new employer. The new employer should use the tax code which is shown on the P45.

If you do not have a P45, (perhaps because your previous employer is late issuing it, this is a second job, or you were previously self-employed, a student, or on a career break) then the employer should decide which PAYE code to use by using the starter checklist . Your new employer will ask you a number of questions to complete this form.

It is important that the starter checklist is correctly completed, or you could pay the wrong amount of tax. Your employer should ask you to confirm which of the three options set out under ‘employee statement’ applies to you.

Your employer will then use your answers to determine which of three tax codes to use. It is most important that you tell your employer if you have any other paid work, taxable benefits or pension income. If the form is completed correctly, then for most people this should mean the correct tax code is used.

Employers may also make adjustments to reflect Budget changes to some tax codes at the start of a tax year. For example, if you had the usual 1257L tax code for 2021/22 and no code is reissued before the start of 20221/232 tax year, your employer will automatically amend the code to reflect the Budget increase in tax free personal allowance that applies for 2022-2332 so your new code will be 1257L.

If you believe your tax code is wrong you should contact HMRC who will issue your employer with a revised tax code as required. This can be done by phone – 0300 200 3300 – or on-line .

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.