PAYE tax codes explained.

Tax codes can be confusing, especially if you’re worried about getting things wrong. This page explains how PAYE tax codes work, where to find yours, and what to do if it doesn’t look right – so you can be sure you’re not paying more tax than you should. Take your time, and remember we’re here to help if you need it.

What is PAYE?

If you are an employee, then your employer must use Pay As You Earn (PAYE) to pay your Income Tax and National Insurance (NI). This means that your NI and Income Tax is taken out of your wages before you get them. They use a PAYE tax code to work out how much you need to pay.

How do they decide which tax code to use?

The tax code may be given to your employer by HMRC. Or, if you have changed jobs, you should have been given a P45 from your previous employer. You give this to your new employer and they should use the same tax code. If you don’t have a P45 then your employer will use a standard code. They will go through a starter checklist with you to work out your tax code.

Where do I find my tax code?

You can find your tax code:

• On your payslip
• On letters or emails from HMRC
• By checking your tax code on HMRC’s website and signing up for a personal tax account.
• By contacting HMRC
• On your P45

PAYE codes and what they mean.

You will normally be sent a notice of what code you are on (on a form called P2) by HMRC in January or February each year. Your employer will be told what this code number is but not how it has been worked out. This means that your employer can’t check if a code is correct. That is why you may need to check it yourself.

What the numbers mean.

The number in your tax code tells you employer how much money you’re allowed to earn before you start paying tax (‘K’ code is the only exception, see below). To create the code, HMRC remove the last digit of your personal tax free allowance. For example, if your personal tax-free allowance is £12,570 then the beginning of your code will be 1257.

What the letters mean.

Most people will be entitled to the Personal Allowance so the most common tax code is1257L. If you have another letter on your tax code, you can see what it means on the list below:

• L: The L in your tax code reflects that you are entitled to the basic Personal Allowance which says how much you can earn before paying tax
• 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 recently changed jobs.
• D0: This is similar to BR and means you do not get any allowances but instead pay tax on 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 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 you can find more information on HMRC’s website. If you are unsure of what your letter means then contact HMRC or our helpline.

What if I’m on an emergency code?

If you start work as an employee part-way through a tax year, you may be put on a Week One, or Month One code at first. This means that your tax is calculated based on your weekly or monthly pay, not the whole tax year. These codes have W1 or M1 at the end. If you are still on this code at the end of the tax year, you should contact HMRC. See below for how to do that.

What can make my tax code complicated?

There are a few things that can complicate which tax code you should be on.

State benefits.

If you get benefits like Jobseeker’s Allowance, HMRC might work out how much you’ll get and reduce your tax-free amount.

Perks from work.

Things like a company car count as extra income and reduce your tax-free allowance.

Unpaid tax from past years.

If you owe tax or National Insurance, HMRC might include that in your code.

Work expenses.

If you claim expenses for things like uniforms or tools, your code might be adjusted. Find more information about this on our employee expenses page.

What if I get income from a pension and work?

If you’ve got more than one pension, or income from a job and pension, tax codes can be complicated. Find out more about tax and pensions.

What if the code is wrong?

The amount you pay through PAYE is not always right. Particularly where you have more than one job or pension it can be difficult for HMRC to get all the codes right. About 15% of PAYE taxpayers are likely to pay the incorrect amount of tax each year – either too much or too little. HMRC checks your overall tax position after the end of each tax year. If the code/s you’ve been given is wrong, you will have paid the wrong amount of tax. If you’ve paid too little (an underpayment) you may have to pay the remaining bill. If you’ve paid too much (an overpayment), you will receive a refund.

Can my employer or pension provider pay it back, if it’s their mistake?

If you haven’t paid enough tax, it may be due to a mistake by your employer or pension provider. You can ask HMRC to collect the tax from them instead of from you. You will need to show HMRC that it is likely that the employer made a mistake and that you would like them to look into it. If the employer can show that they didn’t make a mistake or acted in good faith, then you will have to pay the tax. You can find out more about this on the HMRC website.

Can HMRC clear the tax I owe?

HMRC may clear the tax you owe if they had the information to find and sort out a problem with your tax code but they didn’t solve the issue. This is covered under the Extra Statutory Concession A19 (ESC A19). They will only do this 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. HMRC expects you to have checked your tax code when you received it and contacted them for an explanation.

It can be difficult to claim ESC A19 for anything but exceptional circumstances. You can find more information about ESC A19 on the HMRC website.

How do I contact HMRC?

You can contact HMRC on the Income Tax Helpline 0300 200 3300 or the HMRC contact us page.