HMRC issue PAYE codes to your employer, or pension provider, to tell them what tax free earnings you are entitled to so that the appropriate rate of tax is calculated on the rest of the income/pension (but HMRC do not tell them how they have worked this out). You may receive a copy of the corresponding PAYE coding notice that HMRC issue, or you can view these on your online Personal Tax Account. Your employer will only change your code number if they receive notification to do so from HMRC.
To make sure that you are paying the correct amount of tax, you should check that HMRC have used information about you correctly in working out your tax code on your PAYE coding notice.
HMRC calculate your tax code based on the information they have about you. This includes allowances (e.g., your tax free personal allowance) and reliefs you may be entitled to that essentially increase the amount of tax-free income you can have and reduce the amount of income on which you pay tax (e.g., tax relief for job expenses). You may also have items in your tax code that reduce your tax-free amount and so increase the amount of tax that you pay, such as state pension, employer provided benefits in kind such as private medical insurance, tax owed from an earlier period or other income that it is not possible to tax before you receive it.
Tax codes can change when you start a new job (especially if you do not have a P45 and have completed a ‘new starter checklist’ instead) or if benefits information or your self assessment tax return has been submitted to HMRC.
The number in your tax code shows the tax free allowance due (without the last digit), followed by a letter. For example, in 2023/24, a taxpayer in England whose tax-free amount is just the personal allowance of £12,570 will have a tax code of 1257L. Some other letters you may see are as follows:
- Tax codes for Scottish taxpayers start with S, and tax codes for Welsh taxpayers start with C.
- An M might be at the end of your tax code if your spouse or civil partner has transferred some of their personal allowance to you using the marriage allowance, or an N if you have transferred some of your personal allowance to your spouse or civil partner.
- A T might be used at the end of a tax code where there are items in your tax code that HMRC need to review each year, for example, when your tax free personal allowance needs to be split over two jobs.
- Codes that begin with K will occur when items to reduce your tax free allowance add up to more than the allowance itself, creating in effect a “minus allowance”. HMRC have to then treat this as extra income on which tax is due.
- A BR code is commonly used on a second employment or pension where no tax-free amount is available as it has all been allocated against the other “main” employment or pension. All the tax is then deducted on this second income at the basic rate. Similarly, D0 would be used to tax all of the second income at the higher rate.
- An NT code means that no tax will be deducted from the income. This can be the case for those who are not resident in the UK.
If you do not understand the tax code you have been given, or think it may be wrong, you would need to contact HMRC so they can investigate the matter, go over your circumstances with you, and then correct the tax code if necessary.
