Employees and pensioners have tax deducted under Pay As You Earn by means of what are called ‘PAYE codes’.
You should check your code number and what tax is being taken off your income and query it with HMRC if you do not understand or think it might be wrong.
We explain in this section:
- What is PAYE?
- Who is taxed under PAYE?
- How PAYE works – the basics
- What makes up a tax code?
- Special tax codes
- Emergency tax codes
- Your code changing part way through the tax year
- Who gets PAYE coding notices?
- Checking your PAYE coding notice
- Reconciliations and refunds
- Examples
PAYE stands for Pay As You Earn. It is the system for collecting tax from your earnings or pensions during the tax year. The tax year begins on 6 April in the year and ends on 5 April in the following year.
PAYE is a three-party process, involving HM Revenue and Customs (HMRC), your employer or pension provider and you. Each has a role in its operation.
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If you are:
- employed (that is, you work for an employer and not for yourself); or
- receiving a pension from a former employer; or
- receiving an annuity which is paid under a pension plan; or
- perhaps a combination of the above; and
- your total income is enough to make you liable for tax
then in most cases the tax due from you can be taken off your pay or pension under the Pay As You Earn (PAYE) system. How often tax is taken off depends on how often you are paid – usually weekly or monthly for employees and most pensioners, but some pensions might only be paid quarterly or annually.
For millions of people this means that they pay their tax (and National Insurance, if they are working and are below state pension age) as they go along, during the tax year, and no repayment of tax or further tax will be due at the end of the year.
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HMRC will:
- calculate a tax code for you
- send you a PAYE coding notice (a form ‘P2’), if they are required to do so, showing you how they have worked out your tax code. For cases where HMRC are not obliged to issue a coding notice see below, but you can still ask them for one
- tell your employer or pension provider what your tax code is (but not how it has been worked out).
Your employer or pension provider then uses that tax code to work out how much tax to take off your weekly or monthly pay or pension. They regularly pay over that tax (and National Insurance contributions, if appropriate) to HMRC.
Getting into the PAYE system
When you start a new job or start to receive a pension for the first time, HMRC will not be able to work out your tax code until they have received some information from either you or your employer or pension provider.
Taking on a new job
For employees, there is a procedure when starting a new job - your employer has to follow a 'new starter process'. This can involve two possible HMRC forms - the P45 and the P46, or gathering of the equivalent information from you.
This procedure allows your employer to use a tax code when paying you, while waiting to see if HMRC will recalculate it.
You can read more about this below.
Starting to receive a pension
Some new pensioners may have a P45 to hand to their pension providers (if, for example, they have just stopped working and immediately afterwards started to take a pension). But many pensioners do not and the pension companies should send details of their new pensions direct to HMRC via the electronic PAYE system. As a pensioner, you will not see this yourself, as the pension company submits the information direct to HMRC.
If you turned 65 or were approaching state pension age prior to 6 April 2013, you should have received from HMRC form P161 asking for details of your estimated retirement income. It is important to fill this in as best you can and send it back to HMRC. Check that they have used the information you provided correctly on any coding notices they send you. HMRC no longer issue form P161 to people who reach state pension age on or before 6 April 2013.
Payslips
If you are employed you will be given a payslip (possibly electronically) each time you are paid. This will show:
- your pay before tax (your ‘gross’ pay), including any bonuses
- the tax deducted
- the amount you take home (your ‘net’ pay)
- your National Insurance contributions
- any income-contingent student loan repayment.
It should also show statutory payments such as redundancy, sick, maternity and adoption pay.
It may also show the tax code your employer used to work out the tax to deduct from your gross pay.
If you are getting a pension, you generally do not get a payslip with each pension payment. However, you should get some form of notification if there is any change to the pension payment if, for instance, your tax code changes.
The tax year end
So long as you are employed or receiving a pension at 5 April, the end of the tax year, your employer or pension provider will give you an ‘end of year certificate’ (form P60 or its equivalent) by 31 May. This will show your pay or pension and the tax deducted and possibly any pay and tax from an earlier employment in the same tax year.
Your employer or pension provider will give the same information to HMRC who should then check that the tax deducted is the right amount, according to their own calculations. If it is, no further action is likely to be needed. If their calculations show that the right tax has not been deducted, HMRC will contact you.
However, if HMRC do not have correct and current information about your circumstances, their records might show nothing is due back to you or owed by you, but you might need to take action.
See more on 'reconciliations and refunds' below.
Checks you should carry out
Although the system sounds pretty simple, things can go wrong so it is very important that you check:
- your PAYE coding notice
- that HMRC have used information about you correctly in working out your tax code
- that your employer or pension provider is using the correct tax code for you.
This guide aims to help you to do just that.
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Allowances
Most people who pay tax in the UK are entitled to personal allowances. These are the starting point for most tax codes.
If you have no other income, you can have earnings or pensions up to the amount of your personal allowance without owing any tax.
There may be other amounts to add to your personal allowances to increase the amount you can earn before paying tax (your 'tax free amount') and therefore reduce the tax you have to pay. For example, there may be an amount to be added for certain job expenses (such as using your own car for business) or professional subscriptions.
Reductions
There may be some items in your tax code that reduce your tax free amount. For example:
- if you receive a state pension. The state pension is taxable but the Department for Work and Pensions, who pay it, do not operate the PAYE system. The tax due is therefore collected by reducing your tax free amount by the amount of state pension you are entitled to for the year
- if you are employed and your employer provides you with benefits, such as private medical insurance or a company car, the value of those benefits is taken off your tax free amount
- if you owe tax for an earlier tax year your tax free amount may be reduced so you that you pay it back.
- if you receive income that it is not possible to tax before you receive it, your tax free amount will be reduced by an estimate of that income. For example, if you rent out a property, HMRC might reduce your tax free amount by an estimate of your rental income, or if you invest in certain National Savings and Investments products where the interest is paid without tax deduction, HMRC will reduce your tax free amount by an amount of estimated interest.
What does the number in your tax code show?
Your tax free amount, reduced as necessary, is turned into a tax code.
HMRC divide the tax free amount by ten and then add on a letter. For example, in 2013/14, someone aged 45 whose tax free amount is just the personal allowance of £9,440 will have a tax code of 944L.
See ‘K codes’ below to find out what happens when the reductions to your tax free amount are more than your personal allowances.
Letters in tax codes
The letters used in tax codes often will not mean much to you. Most are there for HMRC or your employer or pension provider to refer to.
Personal allowances and tax rates may change. Rather than issue new tax codes to millions of people, HMRC will tell employers and pension providers to simply increase by a certain amount all codes ending in, for example, the letter L.
These are the letters used in tax codes:
- L is used at the end of the tax code of someone who was born after 5 April 2048, for example, 944L
- P is used at the end of the tax code of someone who was born between 6 April 1938 and 5 April 1948 and whose taxable income is below £26,100, for example, code 1050P.
- Y is used at the end of the tax code of someone who was born before 6 April 1948 whose taxable income is below £26,100, for example, code 1066Y
- T is used at the end of the tax code if there are items in your tax code which HMRC need to review each year, for example, where you were born before 6 April 1948 and your taxable income is more than £26,100
- if your personal tax allowances are reduced to nil you will be given a code 0T. Basic rate tax (20% in 2013/14) will be deducted from your pay up to a certain level, over which the higher or additional rates of tax will be deducted (40% and 45% respectively in 2013/14)
- if HMRC decide that no tax should be deducted, they will issue a code NT (standing for ‘no tax’). This is usually because you have another employment or pension and the tax code used for that one will collect the tax due from both sources (by reducing your tax free amount by an estimate of the income from the second, NT coded source).
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K codes
Items that reduce your tax free allowances can add up to more than those allowances, resulting in minus allowances. When this happens, these minus allowances are treated as extra income on which tax is due and a special code number, beginning with the letter K, is used.
If you divide the minus allowances by ten, then take off one, you will get the K tax code. For example, if you have minus allowances of £2,970, your tax code will be K296.
Although K codes are designed to collect extra tax, if you have a K code, your tax deduction for each pay period cannot be more than half of that pay or pension. For instance, if your pay for the week is £300, a K code cannot result in more than £150 being deducted from you in that week.
Code BR
Code BR stands for basic rate (in 2013/14, 20%) and is usually used for a second employment or pension where there is no tax free amount available to reduce your tax deductions. It is different from code 0T. With code BR, tax will only be deducted at basic rate at this job or pension, no matter how much you are paid. But where code 0T is used, tax at the higher and additional rates can be deducted once your income goes over a certain amount.
Code D0
This code is used if all income from this employment or pension is expected to be taxable at 40% (the higher rate). There will usually be another employment or pension where your tax free allowances are given and where at least some of your tax will be deducted at 40%.
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Starting a job without a P45
If you start a job without having a recent form P45 Parts 2 and 3 to hand to your new employer, your employer will ask you to provide certain information - they may refer to this as 'P46' or 'new starter' information.
Your new employer must get this information directly from you not, for example, third hand from your manager and they must keep a record of the facts and how they got them. Your employer will also need to know your employment history for the current tax year so that the correct tax code is used. They should ask you to declare which of the following three categories you fall under.
A. This is your first job since last 6 April you have not been receiving taxable Jobseeker's Allowances, Employment and Support Allowance, taxable Incapacity Benefit, state pension or occupational pension.
B. This is your only job, but since last 6 April you have had another job, or have received taxable Jobseeker's Allowance, Employment and Support Allowance or taxable Incapacity Benefit. You do not receive a state or occupational pension.
C. You have another job or receive a state or occupational pension.
You will also be asked questions about whether you have a student loan. This refers to whether you are obliged to start repaying your student loan and whether your employer should make deductions from your wages. So if you are still studying, it is unlikely to apply to you. This is covered in more detail in employee student loan repayments.
Depending on your answers to the new starter questions, your employer will use one of the following PAYE codes:
- one which gives you the full benefit of your annual personal allowance, sometimes described as a ‘cumulative’ tax code
- one which gives you part of your personal allowance for each pay period so, if you are paid monthly, you get one twelfth of your annual personal allowance each month and if you are paid weekly, you get one fifty second’s worth. This code may be referred to as being used on a ‘week 1’ or ‘month 1’ code
- code BR which means you pay tax at the basic rate, currently 20%, on all of your wages.
If this is your first job in the tax year, you can usually declare to your employer that you fall under category A on the new starter checklist, which means a cumulative code will apply.
If since the start of the tax year, 6 April, you have previously worked or claimed taxable state benefits, you will tick box B on the P46 and your employer will then use an ‘emergency’ tax code.
For 2013/14 the emergency code is code 944L followed by “week 1” or “month 1”. This code gives you the benefit of 1/12 (if you are monthly paid) or 1/52 (if you are weekly paid) of the basic personal allowance, each time you are paid so you will receive some tax free pay. It can take no account of your previous employment history or of any other tax free allowances you may be entitled to or any reduction to your tax free amount that should be made.
You will continue on the emergency code until either:
- HMRC send you a PAYE coding notice and tells your employer the correct code number to use. Any overpaid tax should be repaid to you on the first pay day when the new tax code is used provided the tax year has not ended in the meantime; or
- the following 5 April. Your employer will use the same code number in the new tax year, but not on a week 1 or month 1 basis. HMRC should still send you a PAYE coding notice confirming your correct code number – see Who gets PAYE coding notices.
Emergency tax code - Starting a job with a P45
If you do have a form P45 to hand to your new employer and it shows that at your last job you were taxed on emergency code, your new employer will continue using that emergency code until HMRC issue a new code number.
When HMRC have details of your previous pay and tax, they should then be able to issue a PAYE coding notice to you and provide your employer with your revised tax code. Your employer will deduct the tax in future using the new code and repay any overpaid tax.
If you think you are paying too much or not enough tax, contact HMRC. If you can provide them with enough information about your circumstances, HMRC may be able to adjust your code immediately. If not, they might ask you to wait until after the next 5 April when you can send them your full income details, for example copies of your P60s, to check the position. See our section on Reconciliations and refunds.
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You may be taxed on a special basis if your circumstances change and HMRC have to reduce your tax code part way through the year. They will tell your employer the new emergency code number and ask that it be used on a month 1 or week 1 basis (depending on how you are paid).
Your new PAYE coding notice will not show this week 1 or month 1 basis, just the new, lower, tax code. But it might have a note on it saying it is to be used in a special way. If you are not sure what is happening, contact HMRC to ask them to explain.
From the time the new emergency code is used, you will have 1/12 (if you are paid monthly) or 1/52 (if you are paid weekly) of your new tax free amount before your employer or pension provider taxes your pay or pension.
For the weeks or months when your code number was too high you will have received too much tax free pay and at the end of the tax year you will owe some tax. Your new PAYE coding notice should give you an estimate of the amount underpaid. It will probably be paid back by reducing your tax code for the following tax year.
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Although millions of people pay their tax under the PAYE system, not everyone needs a tax code notification each year.
If, for example, your tax free amount is just the basic personal allowance for someone born after 5 April 1948, then you may only have received one PAYE coding notice – when you first started work. This is because if the amount of the basic personal allowance changes each year, HMRC and your employer can update your tax code automatically by reference to the code letter ‘L’, without HMRC needing to contact you.
Pensioners’ personal allowances may change as their income changes so they do tend to get PAYE coding notices each year - usually in February for the tax year starting on the next 6 April. Also, they tend to have more than one pension and a coding notice is needed for each one. If you do not receive them, contact HMRC to ask for copies.
People whose tax codes are reduced to take account of:
- untaxed income, such as rents or certain savings income
- underpaid tax from earlier years
- employment-related benefits such as company cars or medical insurance
are sent a PAYE coding notice each year. These notices are usually sent in January for the tax year starting on the next 6 April.
Employees and pensioners who have to complete tax returns will also be sent annual PAYE coding notices.
Your circumstances can change during the tax year so your tax code can be amended at any time and a new PAYE coding notice sent to you. Keep all your coding notices to check that HMRC have calculated your tax code correctly and that your employer or pension provider is using the correct tax code for you.
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PAYE codes are generally notified to employees by a paper 'coding notice' sent through the post. But if you fill in a tax return each year and are registered for Self Assessment Online, you can also view your PAYE Coding Notices online. Before you can use this service, you must have registered for HMRC Online Services and enrolled for Self Assessment Online.
Each PAYE coding notice can be split into roughly four sections for checking:
- personal and contact information
- confirmation of the tax year and new tax code, and the name of the employer or pension provider who will be using that code
- how HMRC have calculated your tax code
- notes explaining each item in the tax code calculation.
Personal and contact information
This first section will contain:
- your title (Mr, Mrs, Dr, Sir etc), your name and address and your National Insurance number – contact HMRC as soon as you can if anything is wrong here
- your tax office name and address and HMRC’s telephone number
- a tax reference (usually in the form 123/500 or 123/A500) – this is your employer or pension provider’s PAYE scheme reference number
- the date of issue of the notice and the tax year to which it relates.
Confirmation of the tax year and new tax code, and the name of the employer or pension provider who will be using that code
Note the tax year that the coding notice refers to: you may receive two PAYE coding notices for different years in the same day’s post!
The name of your employer or pension provider should not be wrong but if it is, contact HMRC.
Pensioners may find some further confusion where they have more than one pension paid by the same pension company. If this is the case, you should check that you have a code number for each pension – they might have different PAYE scheme reference numbers, for instance. Again, if you need clarification, contact HMRC.
How HMRC have calculated your tax code
In this calculation box usually HMRC will first set out your personal allowances and anything else that increases your tax free amount, such as job expenses. These items are then added up.
Anything that reduces your tax free amount, such as a reduction to collect unpaid tax or an estimate of untaxed interest, is then taken off.
This leaves you with a tax free amount which, if positive, is divided by ten and a letter is added at the end to give you your tax code. For example, a tax free amount of £4,921 becomes tax code 492L.
If the result is negative (you have a minus tax free amount) it is divided by ten, a figure of one is taken away and a K is put before the result to give you your tax code. For example, a minus tax free amount of £2,970 becomes tax code K296.
If you think anything in your tax code is wrong, contact HMRC as soon as possible. Do not expect your employer or pension provider to do this for you.
Notes explaining each item in the tax code calculation
A note will be provided for every item in the tax code calculation. These notes are intended to help you to check your tax code but the way the tax rules work means this is not always straightforward.
Gift Aid
If you were born before 6 April 1948 and your income is more than £26,100, Gift Aid payments reduce your total income for the purposes of calculating your age-related personal allowance, meaning you pay less tax. This means that an 'estimated income' figure on your coding notice should have been calculated deducting Gift Aid payments.
There is a snag. As Gift Aid payments are treated as paid after basic rate tax (20% for 2013/14), they need to be what is called ‘grossed up’ before they are deducted. So you take the amount you paid, multiply it by 100 and divide it by 80 – meaning for every £80 you pay in Gift Aid, you get a £100 deduction from your income in the age-related personal allowance calculation.
There is more about this in our Tax allowances section for pensioners.
Unpaid tax
If you have a ‘reduction to collect unpaid tax’ item in your code number, your coding notice will show the actual amount of unpaid tax. HMRC ’gross up’ that figure (multiplying by 100 and dividing by 20, if you pay tax at basic rate) and reduce your tax free amount by the result, so you pay extra tax on the grossed up figure.
For example, if you are aged 54 and owed £47 for the 2012/13 tax year, the calculation box on the 2013/14 PAYE coding notice would look like this:
| Here is how we worked it out: your personal allowance 9,440 (see Note 1 below) reduction to collect unpaid tax £47 235 (see Note 2 below) a tax free amount of £9,205 (see Note 3 below) If we have got this wrong etc etc |
The extra tax that you will pay at 20% because of having £235 fewer personal allowances will collect the £47 unpaid tax (235 x 20% = 47).
Married couple’s allowance
If you have married couple’s allowance in your coding an adjustment has to be made because your tax free amount reduces the tax you pay at 20%, whereas the law says that tax relief for married couple’s allowance is to be given at 10%.
For example, if you are a married man, born before 6 April 1935, and your income in 2013/14 is £19,880, your tax relief for married couple’s allowance will be £7,915 at 10% = £791.50.
But the calculation box in your coding notice would look like this:
Here is how we worked it out
your personal allowance 10,660 (see Note 1 below) married couple’s allowance add 3,958 (see Note 2 below) 14.618 your state pension - 7,865 (see Note 3 below) a tax free amount of £ 6,753 (see Note 4 below) If we have got this wrong etc etc |
Having £3,958 in your coding reduces the tax you pay, at 20%, by £791.50. This is the same result as £7,915 at 10%.
Tax free pay and tax rates
The final numbered note on your coding notice tells you:
- the amount you can earn or the pension payment you can receive each month or week before you start to pay tax
- the maximum amount of income that can be taxed at 20%
- when higher or additional rates of tax would start to be charged.
Special notes
Finally you may see a ‘special note’. This note could ask you to check that your employer is not incorrectly deducting National Insurance contributions from you, or it could advise you of an estimated amount of underpaid tax that may be owed at the end of the tax year because your tax code was reduced.
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As noted above, PAYE does not always result in the correct tax being paid by the end of the year. Checking your codings as above should help to minimise any problems but you might still receive a tax calculation (a ‘P800’) from HMRC at some time after the end of the tax year when they put all your records together. Alternatively, you might have to contact HMRC for a refund.
When HMRC send you a P800 calculation, which shows you owe tax, you will usually have to pay it back. You might have options as to how you pay it back - for example, spreading it over a period of more than one year - especially if it will cause you hardship to pay all in one go or have it collected through next year's PAYE code.
You might not always have to pay it back. Occasionally, things can go wrong – for example, your employer or pension provider might have failed to operate the tax code issued by HMRC meaning you have paid too little tax. Or HMRC might have made a mistake and it might not be fair for them to ask you to pay it back.
Have a look at our guidance on PAYE tax calculations for more information.
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Finally, here are some examples to help put numbers to the situations outlined above.
| JakeBR code Jake works for the local leisure centre. He starts to receive a second salary from a new job he takes on working a few evenings in a cafe. Code BR is to be operated on the new job. Each monthly payment of £200 he receives at the cafe will be taxed at the basic rate of 20% so Jake will actually get £160 in his hand. |
| Milly0T code Milly has a job in a factory. She has other income as well which uses up her personal allowance. Milly has received a coding notice showing that code 0T is to be operated against her factory wages. Her pay before tax for 2013/14 is £1,000 a month but she will have no allowances to set against the amount she receives. So Milly will be taxed on the full £1,000 at 20% basic rate and she will have tax of £200 to pay. |
| MeenaD0 code Meena gets wages of £1,200 a month. Because her personal allowance and basic rate tax band are used against other income she has a code D0 in respect of the employment. Each monthly payment she receives will be taxed at 40% so Meena will receive the net amount of £720 in her hand. |
| Tim - weekly earner - working out tax from code number |
| Tim earns £14,300 a year from his job before any tax is taken off. He is paid weekly and his code number for 2013/14 is 205L. |
| This means Tim has a tax-free amount of allowances of £205 x 10 or £2,050. |
| | |
| Pay from employment | 14,300 | |
| Take off tax free amount of allowances | 2,050 | |
| Wages on which Tim pays tax | £12,250 | |
| £12,250 @ 20% (basic rate) | £ 2,450 | |
| So the tax to be paid by Tim during 2013/14 is £2,450. |
| The tax he will pay each week is £2,450 divided by 52 = £47.12. |
| Heather - monthly earner - working out tax from code number |
| Heather earns £5,500 a year before tax. She is paid monthly and has a code number of 410L. This means that Heather has tax-free allowances to take off her pay of £4,100. |
| | |
| Pay from employment | 5,500 | |
| Take off tax free amount of allowances | 4,100 | |
| Wages on which Heather pays tax | 1,400 | |
| Tax payable | | |
| £1,400 @ 20% (basic rate) | £ 280 | |
| So the tax to be paid by Heather during 2013/14 is £280.00. |
| The tax she will pay each month is £280 divided by 12 = £23.33. |
| Jay- monthly paid wages (or pension) - working out tax from K code |
| Jay receives wages (this would work exactly the same if instead he was receiving an occupational pension) of £12,000 before any tax is taken off. He is paid monthly and his code number for 2013/14 is K120.
|
| This is worked out by adding up his allowances which are: |
| | |
| Personal allowance | 9,440 | |
| Allowable job expenses | 465 | |
| Total allowances | £9,905 | |
| From this we take off any deductions: Car benefit | 4,950 | |
| Tax underpayment from an earlier year | 6,165 | |
| Total deductions | £11,115
| |
| This means that Jay has minus allowances of £1,210 (9,905-11,115) which is treated as additional income. His code number is then £1,210 divided by 10 = 121 minus 1 so K120. | | |
| Wages | 12,000 | |
| Add on extra income | 1,200 | |
| Wages on which Jay pays tax | £13,200 | |
| Tax payable | | |
| £13,200 @ 20% (basic rate) | £2,640 | |
| So the tax to be paid by Jay during 2013/14 is £2,640. |
| The tax he will pay each month is £2,640 divided by 12 = £220. |
| Emily - working out PAYE on a monthly basis |
| Emily works for a single employer, but her earnings fluctuate each month depending on how much overtime she works. She is not entitled to any special allowances and has no benefits or expenses relating to her job so her PAYE code gives her only the basic personal allowance of £9,440 for 2013/14. This makes her code 944L, which is used by her employer on a cumulative basis. So, each month from the start of the tax year on 6 April, Emily is allocated one-twelfth of her personal allowance. For 2013/14 that is £9,440 divided by 12,so £6786 |
|
| April | | |
| April earnings | 746 | |
| Take off April allowances | (786) | |
| Spare allowances to use in May | £(40) | |
|
| May | | |
| May earnings | 746 | |
| Take off spare allowances from April | (40) | |
| Take off May allowances | (786) | |
| Spare allowances to use in June | £(80) | |
|
| June | | |
| June earnings | 946 | |
| Take off spare allowances from May | (80) | |
| Take off June allowances | (786) | |
| Taxable pay | £80 | |
(Tax at 20% is £16 and there are no spare allowances to use next month)
| | |
| July | | |
| July earnings | 646 | |
| Take off spare allowances from June (as above there are none to use) | (0) | |
| Take off June allowances | (786) | |
| Spare allowances | £(140) | |
| But because Emily's tax code is cumulative (that is, calculating her tax looking at the whole year, not just each month), the extra £80 that was taxed in June now uses up some of July's spare allowances. So: | | |
|
| Spare allowances in July | 140 | |
| Take off taxed pay from June (tax refunded £16) | 80 | |
| Leaves spare allowances for August | £60 | |
| And so it goes on throughout the year. | | |
Examples of coding notice issues for older people can be found in our
Pensioner section.
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