PAYE Tax Codes Explained
Checking your tax code is important. It’s your responsibility to make sure your tax code is right. If it’s wrong you could be paying too much tax.
Your tax code is worked out by HMRC and sent to your employer or pension provider, who uses it to determine how much tax is taken out from your pay or pension. In most cases, a tax code has 3 numbers and a letter.
For the 2013 to 2014 tax year, the basic tax code for most people with one job, who were born after 5 April 1948, is 944L.
If you have only one job or one pension, you’ll only have one tax code. However, people with more than one employer or pension usually have a different tax code for each. HMRC adjusts your tax codes to make sure you:
- Pay the correct amount of tax each year for all of your income
- Receive your tax-free Personal Allowance
Your tax code does not reflect how much you earn. It only lets employers or pension providers determine how much tax they should take from your payments.
Having an Incorrect PAYE tax code…
It’s quite common to have an incorrect tax code. There are many reasons why your tax code could be wrong and can mean you are paying too much tax.
Common reasons why your tax code could be wrong are:
- You are not claiming available tax code allowances due to having expenses because of your job – like washing your own uniform, buying tools for work or paying into a professional body. If you are not claiming you could be due a tax rebate. If you think you can claim a tax code allowance you should get in touch with Tax Rebate Services today. We can help you claim back what you are owed. Call 0845 094 0005 or 01228 520477 from a mobile.
- You have changed employers and have an emergency tax code
- You have had company benefits in the past and no longer have them
How can you find your PAYE tax code?
If you want or need your tax code, you can get it from:
- Payslips issued by your employer or pension provider
- Your P60 issued by your employer at the end of the tax year
- A P45 from former employers at jobs you’ve left
- PAYE Coding Notice, which you may receive by post, or if you’re registered you can check through HMRC’s Self Assessment online service
What your PAYE tax code numbers mean
The numbers in your tax code let your employer or pension provider know how much of your income will be tax-free in a given tax year. HMRC determines your tax-free personal allowance by:
- Adding up any income that you haven’t paid tax for (such as part-time earnings or untaxed interest) and the value of your job benefits, if any (such as a company car)
- Subtracting the income that you haven’t paid tax on from your allowances.
The remaining number is your allowable tax-free income. This amount is divided by ten, and becomes the number portion of your tax code—unless you have the letter ‘K’ in your tax code, in which case the process is different.
What your tax code letters mean
The letter in your tax code signifies how much taxes your employer or pension provider should take from your pay or pension. Below is a guide to what tax code letters mean:
- L: You’re eligible for the basic tax-free Personal Allowance
- 0T tax code: The 0T tax code means either a) your personal allowance is used up, or b) you started a new job and don’t have a P45 form from your previous employer, or c) you haven’t given a new employer the information they need to assign a tax code
- BR: Your income from this pension or job is taxed at the basic rate of 20% (this letter code is typically used if you have more than one job or pension, and your most recent employer is waiting for a tax code)
- P: You’re entitled to a full tax-free Personal Allowance (for people born between 6 April 1938 and 5 April 1948)
- T: Other calculations have been used to work out your Personal Allowance (for example, your income is over specified limits and your Personal Allowance has been reduced
- D0: Your income from this pension or job is taxed at the higher rate of 40% (typically assigned to people with more than one job or pension)
- D1: Your income from this pension or job is taxed at the additional rate of 45% (typically assigned to people with more than one job or pension)
- NT: You are exempt from paying tax on this income
When your tax code begins with ‘K’
If your tax code starts with the letter ‘K’, it means that you have non-taxed income that is worth more than your tax-free Personal Allowance. This can happen if you are:
- Paying on tax through your wages or pension that you owe from a previous year
- Receiving taxed State benefits, such as the State Pension
- Receiving taxed benefits from work, such as health insurance or a company car
Your employer or pension provider is responsible for taking tax due on your income that hasn’t been taxed from your payments—even if the untaxed income is being paid to you through another organisation.
If you have a ‘K’ tax code, employers or pension providers aren’t permitted to take more than half of your pre-tax payments.
When your tax code ends with ‘W1’ or ‘M1’
Week 1 (W1) and Month 1 (M1) designate emergency tax codes, which means your tax is based on your wages for the current pay period, rather than for the entire year.
The code you are assigned depends on whether you receive pay weekly or monthly. These codes always appear at the end of your tax code—for example, ‘577L W1’ or 577L M1’. Emergency codes are never used to start a new tax year.
Reasons your PAYE tax code might change
Usually, your tax code changes if you either start or stop receiving:
- Income that is not being taxed, such as rental income
- State benefits that are taxed
- Benefits from your job that are taxed
- Work expenses for which you can reclaim tax
Other reasons that your tax code might change is if you are temporarily assigned an emergency tax code when changing jobs, or if you start paying taxes through your wages or pension that are due from previous years.
How is your tax code changed?
- HMRC is notified about the change, either by you, or your employer or pension provider.
- HMRC works out which new tax code or tax codes should be assigned, and sends the new code to your employer or pension provider.
- Your employer or pension provider works out the amount of tax to take from your payments from that point forward
- You are sent a PAYE Coding Notice from HMRC that explains the changes to your tax code
What does your PAYE Coding Notice mean?
HMRC may send you a PAYE Coding Notice prior to the beginning of a tax year, or whenever your tax code changes during the year. This notice explains what your tax code is, and how it’s been worked out.
Unless you believe there is an error on your PAYE Coding Notice, you don’t have to do anything with it.
What does a PAYE Coding Notice contain?
In addition to your tax code, the notice will show any allowances that reduce your tax bill, and any items you’ll need to pay tax on through your wages or pension.
Positive numbers on the PAYE Coding Notice represent the parts of your income that you don’t have to pay tax on. This can include:
- Your tax-free Personal Allowance
- The Married Couple’s Allowance, if you receive it
- Expenses that are repaid by your employer, which you can receive tax relief for
Negative numbers on the PAYE Coding Notice represent income that you haven’t paid tax on, for which the tax will be collected from your wages or pension. This can include:
- Job benefits that are taxed
- State benefits that are taxed
- Tax that you owe from previous years
The calculations on the PAYE Coding Notice show how HMRC has worked out your tax code.
PAYE Tax Codes Explained