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Simple Guide to UK Tax Codes

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Simple Guide to UK Tax Codes

HMRC issues a ‘PAYE Coding Notice’ (Form P2), a couple of months or so before the new tax year starts or during the year if your tax code changes. The onus is put on the employee to check the validity of his or her tax code, not their employer.

In this post we aim to explain how tax codes work. Hopefully by the time you’ve finished reading this post, you should have a better understanding of what your tax code means.

For additional information be sure to read the Government's official guidelines on tax codes. Click here for more information.

What is a tax code?

Essentially, your tax code represents the amount of income you are entitled to free of tax and is used by your employer or pension provider to ensure you pay the right amount of tax each time you are paid. The codes are normally a mix of letters and numbers and will be on your payslips as well as on your end of year P60 summary and if you change jobs your P45.

What is a PAYE Coding Notice?

A PAYE Coding Notice confirms your tax code and explains how it has been worked out. Unless you think it is wrong you don’t need to do anything with it but check that your employer is using the correct code. The notice shows items you need to pay tax on as well as allowances you are entitled to that reduce your tax bill.

Positive numbers relate to income that you do not need to pay tax on such as your personal allowance. Negative numbers relate to income that you need to pay tax on and which will be deducted by your employer or pension provider before they pay you. This could be benefits such as a company car, state pension or even under payment of tax in previous years.

If you believe the calculation or information used to make the calculation is wrong you should contact HM Revenue & Customs and explain why. You could end up paying too much or too little tax so it is vital you check.

Tax code numbers

The number part of your tax code informs your employer how much tax free earnings you're entitled to. As a general rule of thumb multiplying the number by 10 will tell you how much tax free income you are entitled to for that tax year. The number 1060 at the time of writing refers to the current personal allowance of £10,600 for the 2015/16 tax year.

Tax code letters/suffix

The letters provide further information on the type of benefits you might receive or the rate of tax you should pay

  • L = you are entitled to the normal (basic) personal allowance for tax payers born after 5th April 1948
  • P = denotes normal personal allowance for tax payers born between 6th April 1938 and 5th April 1948
  • M = denotes you are in receipt of up to 10% of your partner’s unused personal allowance (maximum of £1,060 for the 2015-16 tax year)
  • N = denotes you have opted to transfer your unused personal tax allowance to your partner (maximum £1,060 in 2015-16)
  • Y = you were born before 6 April 1938 and therefore are entitled to the bigger full tax free personal allowance
  • T = this tax code is used when other calculations have been made to get your tax code such as it being reduced because your income is more than the basic rate limit.
  • BR = all pay from a specific source is taxed at the basic rate (BR). Typical when all of your tax free allowance has used by another source of income, such as if you have more than one job then BR will be used on additional employments
  • DO = all pay from a specific source is taxed at the higher rate (DO
  • NT = you are exempt from paying tax from the specific source of income the code applies to

K = means you have other income which is not being taxed elsewhere which is more than your tax free allowance. Whereas the other tax codes indicate how much you are entitled to tax free by multiplying them by 10 a K code is roughly multiplied by 10 to indicate how much be added to your taxable income to account for the untaxed excess income you received.

W1 or M1 are sometimes referred to as ‘emergency tax codes’ and appear at the end of your code. Your tax is calculated based on the current pay period rather than cumulatively or the whole year as the others work.