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 – https://www.gov.uk/tax-codes

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 ‘X’ attached to the end (used to be ‘W1’ or ‘M1’); meaning the payroll should be used with the tax code stated, but on a week 1 or month 1 basis

From 6 April 2016, PAYE codes for Scottish taxpayers, will have an ‘S’ prefix.

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 £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 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.

What the letters mean

‘L’ refers to the normal personal allowance.  The letter ‘N’ means that you are part of a couple and have given away 10% of your personal allowance to your partner. The letter ‘M’ means that you have received 10% of the personal allowance from your partner.

‘T’ refers to circumstances where there are other items that require HMRC to look at your tax code.