Checking your coding

Employees and pensioners have tax deducted under Pay As You Earn by means of what are called ‘PAYE codes’.

HM Revenue & Customs (HMRC) has provided a facility to enable Self Assessment customers to view their PAYE Coding Notices online. Before you can use this service, you must have registered for HMRC Online Services and enrolled for Self Assessment Online.

At present you are able to view coding notices issued on or after 11 October 2011, or the date you registered for the self-assessment online service, if later. If you are already using the self-assessment online service, coding notices issued on or after 11 October should be available to view online. HMRC say that in due course, you will be able to view PAYE Coding Notices - issued on or after 11 October 2011 - for the current, previous and next tax year.

More details are available from HMRC.

We explain in this section what you will find on a ‘coding notice’, what all the letters and numbers mean and how to work out your tax using your code number. It is vital that you check what tax is being taken off your income and query it with HMRC if you do not understand or think it might be wrong.

1. What is PAYE?
2. Who is taxed under PAYE?
3. How PAYE works in practice – the basics
4. What makes up a tax code?
5. Special tax codes
6. Emergency tax codes
7. Your code changing part way through the tax year
8. Who gets PAYE coding notices?
9. Checking your PAYE coding notice
10. Reconciliations and refunds
11. Examples

What is PAYE?

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.

It 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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Who is taxed under PAYE?

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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How PAYE works in practice – the basics

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 which involves two possible HMRC forms – the P45 and the P46 - these are described below. (Instead of the paper form P46, your new employer may gather the equivalent information for electronic submission.). This procedure allows your employer to use a tax code when paying you, while waiting to see if HMRC will recalculate it.

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 using a form P46(PEN). As a pensioner, you will not see this form yourself, as the pension company submits the information direct to HMRC.

On reaching, or nearing, state pension age, you should receive 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.

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 pension at 5 April (the end of the tax year that began on the previous 6 April), 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 needed – unless, of course, HMRC do not have correct and current information about your circumstances. In this case their records might show nothing is due back to you or owed by you, but you might need to take action. If their calculations show that the right tax has not been deducted, HMRC will contact you (see 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.

What makes up a tax code?

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 earn or receive pension 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 pay) 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.

On your PAYE coding notice your tax free pay is described as a ‘tax free amount’.

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 should pay it back in the current tax year.
• 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.

Your tax free amount, reduced as necessary, is then turned into a tax code.

HMRC divide the tax free amount by ten and then add on a letter. For example, in 2012/13, someone aged 45 whose tax free amount is just the personal allowance of £8,105 will have a tax code of 810L. But 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 to make HMRC’s and your employer’s or pension provider’s job easier. At the beginning of a new tax year, personal allowances and tax rates may change (and, although it is rare, it is not unheard of for allowances and tax rates to change part way through a tax year). 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 is below age 65, for example, 810L
• P is used at the end of the tax code of someone who is aged between 65 and 74 at some point in the tax year and whose taxable income is below £25,400, for example, code 1050P.
• Y is used at the end of the tax code of someone who reaches 75 during the tax year or who is already aged 75 or over and whose taxable income is below £25,400, 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 are 65 or over and your taxable income is more than £25,400
• if your personal tax allowances are reduced to nil you will be given a code 0T. Basic rate tax (20% in 2012/13) 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 50% respectively in 2012/13 - the 50% rate is reducing to 45% for 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).

Special tax codes

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 2012/13, 20%) and is usually used for a second, continuing 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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Emergency tax codes

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 may tax you on what is called an ‘emergency code’. Your employer will ask you to complete a form P46, or provide them with equivalent information for electronic submission to HMRC.

You might not have a current P45 to hand to your new employer, if for example, this is your first job or you previously worked for yourself (you were self-employed) or perhaps because you have a continuing employment as well as this new job. You will need to fill in the P46 carefully because your employer will use your answers to work out which tax code to use when starting to pay you.

If since 06 April last, 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 2012/13 the emergency code is code 810L 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, under 65, 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 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 issue a new PAYE coding notice

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 – your coding notice should give contact details. If you have not received one, you can look up a contact number on HMRC’s website. 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.

Your tax code for your first job in the tax year

If you do not have a form P45 to give to your new employer and you are able to tick box A on the form P46 confirming that this job is your first job in this tax year, and you have not received any taxable pensions or state benefits, then your employer will use a ‘cumulative’ emergency tax code. This means you will have the benefit of the tax free personal allowance for the weeks or months when you were not working. Because of this, either tax deductions will not start immediately or, depending on how soon after 6 April you started this job and the amount you earn, the first tax you pay will be lower than later on in the year.

Your code changing part way through the tax year

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.

Who gets PAYE coding notices?

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 under 65, 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, ask HMRC 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.

But 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. It is important to 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.

Checking your PAYE coding notice

Each PAYE coding notice can be split into roughly four sections for checking:

1. personal and contact information
2. confirmation of the tax year and new tax code, and the name of the employer or pension provider who will be using that code
3. how HMRC have calculated your tax code
4. 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 (using the contact details shown on the notice) 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

It is important to 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, in most cases, 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.

Then, anything that reduces your tax free amount, such as a reduction to collect unpaid tax or an estimate of untaxed interest, is 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 are 65 or over and your income is more than £25,400, 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 shown on your coding notice should have been calculated deducting Gift Aid payments.

Unfortunately there is a snag. As Gift Aid payments are treated as paid after basic rate tax (20% for 2012/13), 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 2011/12 tax year, the calculation box on the 2012/13 PAYE coding notice would look like this:

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 2012/13 is £19,880, your tax relief for married couple’s allowance will be £7,705 at 10% = £770.50.

But the calculation box in your coding notice would look like this:

Having £3,853 in your coding reduces the tax you pay, at 20%, by £770.50. This is the same result as £7,705 at 10%.

• 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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Reconciliations and refunds

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 in some cases, 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, if it shows you owe tax, you might not always have to pay it back. 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. You might also have options as to how you pay it back – for example, spreading it over a period of more than one year.

Have a look at our guidance on PAYE tax calculations for more information.

Finally, here are some examples to help put numbers to the situations outlined above.

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