How do I check my coding notice?
If you are an employee, your employer deducts tax from your wages or salary under the Pay As You Earn (PAYE) system. In this section we look at what PAYE is and how it is applied to you.
HM Revenue & Customs (HMRC) issue a PAYE code to your employer, to tell them how much tax to take off your income. You may also receive a copy of this PAYE code – this is your PAYE coding notice (form P2). Your payslips should also show the PAYE code that your employer is using.
You should check your PAYE code and what tax your employer is taking off your income. If you do not understand your PAYE code or think it might be wrong, you should query it with HMRC. You can find their contact details on the GOV.UK website.
Since pension providers also use the PAYE system to deduct tax from your pension income, this page is also relevant to you if you are receiving pension income.
You should be able to view your PAYE tax code in your personal tax account that you can read more about in our ‘Tax basics’ section.
PAYE stands for Pay As You Earn. It is the system for collecting tax from your employment earnings during the tax year. The tax year runs from 6 April to 5 April, for example, the tax year 2018/19 runs from 6 April 2018 to 5 April 2019.
There are three parties involved in the PAYE process – HMRC, your employer (or pension provider) and you.
See the section ‘how is my tax collected?’ for more information on the PAYE system.
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 that is paid under a pension plan; or
- taking money out of a pension under the flexible pensions rules; 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 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.
If you are an employee, this applies to you whether you are employed full-time or part-time, permanently or temporarily, and also if you are employed on a casual basis.
If you are a pensioner, this applies to you whether you are receiving an occupational pension, a private pension or a retirement annuity. It also applies if you are receiving a pension and continuing to work as an employee.
Money from pensions may also be taken flexibly, perhaps in regular or irregular lump sums (or the full amount as a lump sum). In this situation, the PAYE system may use an ‘emergency code’ and you may not pay the right tax at the right time. Read our separate guide to flexible pensions for more information.
HMRC do the following:
- 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. There are some cases where HMRC are not obliged to issue a coding notice in hard copy, but you can still ask them for one (you will always be able to see your current coding notice in your personal tax account);
- tell your employer (or pension provider) what your tax code is, but not how they have worked it out.
Your employer (or pension provider) uses that tax code to work out how much tax to take off your weekly or monthly pay (or money you get from your pension). They regularly pay over that tax, and National Insurance contributions (NIC) if appropriate, to HMRC. Note that you do not pay NIC on pension income.
There is information on what happens when you start to receive a pension and other pensioner-specific issues in the 'pensioners and tax section'.
What are payslips?
If you are employed, your employer must give you a payslip, possibly electronically, each time you are paid. This should show:
- your pay before tax – your ‘gross’ pay – including any bonuses;
- the tax deducted;
- the amount you take home – your ‘net’ pay;
- your NIC;
- 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.
What happens at the tax year end?
As 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 shows your pay (or pension) and the tax deducted in the tax year, and possibly any pay and tax from an earlier employment in the same tax year.
Most employers now operate PAYE in real time – ‘real time information’. This means that each time they pay you they tell HMRC how much they have paid you and how much tax they have taken off. After the end of the tax year, HMRC check that the tax deducted is the right amount, according to their 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. See our section ‘what if I do not pay enough tax?’ for more information on this.
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. There is more information on reconciliations and refunds below.
What checks should I carry out?
Although the PAYE system sounds quite simple, it does not always result in you paying the correct amount of tax. 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.
What happens when I leave a job?
Your employer should give you a form P45. You need to keep the form P45 as you should give part of it – Parts 2 and 3 – to your new employer when you move to your next job.
There is more information about the form P45 and why it is important to keep it safe in ‘what happens when I start a new job?’ below.
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 employment earnings (or pension income) up to the amount of your personal allowance without having to pay any tax.
There may be other amounts to add to your personal allowance 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, you may be entitled to other allowances, like the blind person’s allowance, or you may be entitled to claim tax relief for pension contributions, charitable donations, and job expenses, such as using your own car for business or professional subscriptions.
Allowances essentially increase the amount of ‘tax free’ pay (or pension income) you can have and reduce the amount of your employment (or pension) income on which you pay tax. This means you pay less tax and get relief ‘through your code’.
There may be some items in your tax code that reduce your tax free amount and so increase the amount of tax that you pay. For example:
- if you receive a state pension. The state pension is taxable but the Department for Work and Pensions (DWP), 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 may be taken off your tax free amount if your employer is not payrolling them;
- if you owe tax for an earlier tax year, your tax free amount may be reduced so that you pay it back;
if your tax code changes during the year and it appears you may have underpaid tax for an earlier part of that tax year, from June 2017 your tax code is reduced to collect the amount of tax HMRC estimate you underpaid in the tax year before the revised tax code was issued. Normally such adjustments to collect the estimated underpayment for the current year will not be placed in your code number if it is issued after 5 January in the tax year: instead that underpayment is likely to be carried forward and collected in your tax code in a later 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 receive savings interest on which tax is due, HMRC will reduce your tax free amount by an amount of estimated interest.
There is more information below on what happens when the reductions to your tax free amount are more than your personal allowances.
What does the number in your tax code show?
Your tax free amount, reduced or increased 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 2018/19, someone whose tax-free amount is just the personal allowance of £11,850 will have a tax code of 1185L. If you are an employee, this code will tell your employer that you are entitled to £988 tax free pay per month or £228 per week. Remember if you are a Scottish taxpayer, your tax code will start with the letter ‘S’.
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 (on pension provider) to refer to.
Personal allowances and tax rates may change. Rather than issue new tax codes to millions of people, HMRC tell employers to simply increase by a certain amount all codes ending in, for example, the letter L. For example, in 2018/19 when the personal allowance increased from £11,500 to £11,850, HMRC would have sent a bulletin to all employers telling them to increase the numbers for anybody on an L code by 35.
You may come across the following letters in tax codes:
- L – you might find this at the end of your tax code if you are entitled to the basic personal allowance, for example, 1185L;
M – you might find this at the end of your tax code if your spouse or civil partner has transferred £1,185 of their personal allowance to you using the marriage allowance;
N – you might find this at the end of your tax code if you have transferred £1,150 of your personal allowance to your spouse or civil partner using the marriage allowance;
- S – from 6 April 2016 you should find this at the start of your tax code if you are a Scottish taxpayer. This allows an allocation of the total tax paid to be made to the Scottish government.
- T – you might find this at the end of your tax code if there are items in your tax code that HMRC need to review each year, for example:
- if your personal allowances are reduced to nil you will be given a code 0T. Basic rate tax (20% in 2018/19) 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 2018/19);
- if HMRC decide that no tax should be deducted, they will issue a code NT – ‘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.
For an example of a 0T code, see the examples Milly.
Items that reduce your tax free allowances can add up to more than those allowances, resulting in ‘minus allowances’. When this happens, HMRC treat these minus allowances as extra income on which tax is due, and they use a special code number, beginning with the letter K.
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 payment period cannot be more than half of that period’s pay (or pension). For instance, if your pay (or pension) for the week (or month) is £300, a K code cannot result in your employer (or pension provider) deducting more than £150 tax from you in that week (or month).
Code BR stands for basic rate – 20% in 2018/19. HMRC usually use this code for a second employment or pensionwhere there is no tax free amount available to reduce your tax deductions, because the tax free allowance is allocated against your main employment or pension.
It is different from code 0T. With code BR, your employer (or pension provider) only deducts tax at basic rate for that job (or pension), no matter how much you are paid. But where your employer (or pension provider) uses code 0T, they can deduct tax at the higher and additional rates once your income goes over a certain amount.
You can see how this works in the example Jake.
This code applies the Scottish basic rate to your income – 20% in 2018/19. It is used for Scottish taxpayers in a similar way to the BR code described above for taxpayers in the rest of the UK, but will only apply where income is projected to be lower than the Scottish intermediate rate.
This code applies the Scottish intermediate rate to your income – 21% in 2018/19. It is used for Scottish taxpayers in a similar way to the BR code described above for taxpayers in the rest of the UK.
Your employer (or pension provider) uses this code if HMRC expect all income from that employment (or pension) to be taxable at 40% – the higher rate. You may have a D0 code if you have two jobs (or pensions), the main one of which fully uses your tax free allowances and 20% tax rate band. HMRC will apply a D0 code against your second job (or pension) to make sure that you do not underpay tax.
You can see how this code works in the example Meena.
When you start a new job, HMRC cannot work out your tax code until they have received some information from either you or your employer to help them decide what tax free allowances you are entitled to.
For employees there is a procedure when starting a new job – your employer has to follow a 'new starter process'. This normally involves gathering information from you, such as form P45 given to you by a previous employer, or completing a 'new starter checklist'. This information is sent to HMRC, who are then able to estimate a suitable tax code for you in your new job.
PAYE is normally worked out on a cumulative basis. This means that your previous pay and tax figures are taken into account when working out your tax code for your new job. When you leave a previous job, your employer should complete form P45. Form P45 shows your total pay, tax to date in the tax year, and the tax code your employer used.
Employers have a legal obligation to issue a form P45. Employers must send Part 1 of the P45 to the HMRC immediately or as soon as possible after the last pay date. The employer should give Parts 1A, 2 and 3 to the employee as soon as possible.
When you start a new job, if you have a form P45 from a previous job, you should give Parts 2 and 3 to your new employer. This enables your new employer to implement the same tax code you had in your previous job and continue to deduct tax on the correct basis.
If you do not have a form P45, your new employer should ask you for ‘new starter information’. This allows your new employer to gather relevant information from you to help HMRC recalculate your tax code. In the meantime, there is an ‘emergency’ tax code process which enables your employer to pay you without a proper code in place.
If you are undergoing the starter procedure (see below) or for whatever other reason HMRC does not have enough information to issue a full tax code, your employer will use an emergency tax code until more information is received and the tax code can be adjusted.
An emergency code assumes that you are only entitled to the basic personal allowance. It does not take into account any other allowances and reliefs you may be entitled to, such as blind person’s allowance. So the emergency tax code for 2018/19 is 1185L, which is actually the same as the normal code for the vast majority of people.
Sometimes BR codes or Week 1/Month 1 codes are also referred to as ‘emergency’ tax codes.
If you start a job without having a recent form P45 Parts 2 and 3 to hand to your new employer, your employer should ask you to provide certain information – they may refer to this as 'new starter' information or form 'P46'. Form P46 is no longer in use, but the phrase is still sometimes used to refer to new starter information.
Your new employer must get this information directly from you, not, for example, third hand from your manager. They must keep a record of the facts and how they got them. Your employer also needs to know your employment history for the current tax year, so that they use the correct tax code. 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 and you have not been receiving taxable jobseeker's allowance, 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.
Your employer should also ask questions about whether or not you have a student loan and if so, whether you have a Plan 1, Plan 2 or both types of 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. If you are paying the Student Loan Company directly, which may be the case if you have almost completed repaying your loan, then do not inform your employer that you have a loan otherwise you will end up repaying too much. We cover this in more detail on our student loans section on our sister website, Tax Guide for Students website.
Depending on your answers to the new starter questions, your employer will use one of the following PAYE codes:
- one that gives you the full benefit of your personal allowance, sometimes described as a ‘cumulative’ tax code;
- one that gives you part of your personal allowance for each pay period so, if you are paid monthly, you get one twelfth of your 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. This means a cumulative code will apply. You should keep a copy of the information that you provide to your employer in case, later, there is a dispute.
If, since the start of the tax year, 6 April, you have previously worked or claimed taxable state benefits, you should tick box B on the new starter checklist and your employer will then use an ‘emergency’ week 1/month 1 tax code, for example, 1185L W1 or 1185L M1. As you get the benefit of some of your basic personal allowance each pay period, you should receive some tax-free pay.
An emergency code 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.
Your employer will continue to use the emergency code until either:
- HMRC send you a PAYE coding notice and tell 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 – for more information see the section ‘who gets a PAYE coding notice?'.
If you do not complete the new starter information checklist, then code 0T might be operated, which will give you no personal allowances at all.
To see how a cumulative tax code works, have a look at the example Emily.
To see what you can do if you have more than one job, look at the example Janna.
What if I start a job with a form P45?
If you 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 be able to issue a PAYE coding notice to you and provide your employer with your revised tax code. Your employer will deduct tax in future using the new code and repay any overpaid tax through the PAYE system.
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’.
If your circumstances change, your tax code may change part way through the tax year. Common events that can give rise to changes include:
- your employer submits your P11D for the previous year to HMRC;
- you request tax relief through your tax code for charitable donations, for example;
- you realise and tell HMRC that you were on an incorrect tax code earlier in the tax year.
If you have not been paying enough tax through your original tax code, HMRC may have to reduce your tax code part way through the year. HMRC will tell your employer (or pension provider) the new code number and send you a new PAYE coding notice. If you are not sure what is happening, contact HMRC to ask them to explain.
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 would owe some tax if your code number was not adjusted for this. From June 2017 your new PAYE coding notice should give you an estimate of the amount underpaid up to the time the code is issued and show the adjustment in your tax code to collect that estimated underpayment. If the underpayment only becomes apparent towards the end of the tax year, the underpayment will probably be paid back by reducing your tax code for the following tax year.
What can I do about underpayments that are being collected through my code number?
Where the underpayment relates to a tax year before the current tax year, you should already have been notified of the underpayment by HMRC, probably by the issue of a PAYE tax calculation (form ‘P800’). You should follow the advice on our page ‘What if I do not pay enough tax?’
On the other hand, if the underpayment that is included in your code number relates to the current tax year, you should read the explanation of the underpayment given on the coding notice and contact HMRC if you need a further explanation, or if you do not understand or do not agree with the amount. If the inclusion of this estimated underpayment for the current tax year would cause you financial difficulty, you should contact HMRC as soon as possible and ask them to remove it from your code number. Remember that if you do this, you would still have to pay back any underpayment – you are just delaying when this needs to be paid. Normally HMRC would include the underpayment in your tax code for the following year, but if this will cause you hardship you can ask for it to be collected over a longer period of time, normally a maximum of three years.
Although millions of people pay their tax under the PAYE system, not everyone needs a tax code notification each year. on paper. But you can always check your tax code in your personal tax account.
If, for example, your tax free amount is just the basic personal allowance, then you may only have received one PAYE coding notice – when you first started work, or started to receive a pension. This is because if the amount of the basic personal allowance changes each year, HMRC and your employer (or pension provider) can update your tax code automatically by reference to the code letter ‘L’, without HMRC needing to contact you.
If your tax code is reduced or increased to take account of:
- untaxed income, such as rents or savings income;
- underpaid tax from earlier years;
- employment-related benefits, such as company cars or medical insurance;
- pension contributions;
- charitable donations under Gift Aid
HMRC should send you a PAYE coding notice each year, unless HMRC believe that a source of PAYE income is not chargeable to tax, or if you do not have a liability to tax on any PAYE-source income. HMRC usually sends these notices in January for the tax year starting on the next 6 April.
If you are an employee or pensioner and you have to complete a tax return, HMRC will also send you annual PAYE coding notices.
Your circumstances can change during the tax year, so HMRC can amend your tax code at any time and send you a new PAYE coding notice. Keep all your coding notices to check that HMRC have calculated your tax code correctly and that your employer is using the correct tax code for you.
You generally receive a paper 'coding notice' through the post; this explains your PAYE code(s). The form will usually look like this:
Click on the picture above to find out more about the figures and information that make up your tax code, and read the paragraphs below for detailed explanations.
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. You can also sign up for your personal tax account via the GOV.UK website which amongst other things will allow you to view your PAYE coding online, tell HMRC about changes that may affect your tax code and see an estimate of the tax you will pay. HMRC may issue coding notices online, if you have signed up for their online services and agreed to receive them online. You can find out more about your personal tax account in our digital services guide.
You can split your PAYE coding notice into roughly five sections for checking:
- personal and contact information;
confirmation of the new tax code(s), and the name of the employer or pension provider that will be using the code(s);
- how HMRC have calculated your tax code(s);
- notes explaining each item in the tax code calculation;
- HMRC contact information.
Personal and contact information
This first section contains:
- 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;
- a tax reference, usually in the form 123/500 or 123/A500 – this is your main employer’s or pension provider's PAYE scheme reference number;
- the date of issue of the notice.
Confirmation of the tax year
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.
How HMRC have calculated your tax code
In the calculation box, HMRC usually set out your personal allowances first and anything else that increases your tax free amount, such as tax deductible 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. 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. The number is divided by ten, a figure of one is taken away and the letter 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.
Confirmation of the new tax code(s), and the name of the employer or pension provider that will be using the code(s)
The name of your employer or pension provider should not be wrong but if it is, contact HMRC.
If you are a pensioner, you might receive more than one pension from the same pension provider. 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.
You should note that if you have two or more jobs or pensions, then HMRC will issue a tax code for each – they should be contained on the same coding notice. You should cross check them, to make sure that your tax position is correct. For example, if you have two jobs (or pensions), each with the code 1185L, you are receiving double the amount of tax free employment (or pension) income that you are entitled to throughout the year and are at risk of underpaying tax during the year. If, however, one job (or pension) pension has code 1185L and the other has code BR or 0T, you are more likely to be paying approximately the right amount of tax.
If you have two or more jobs or pensions from which you receive a regular income (like occupational/works pensions or annuities from private pensions), neither of which pays enough to use up your personal allowance, you can contact HMRC and ask them to split your personal allowance between the jobs or pensions. This will mean that you do not pay too much tax during the year.
Notes explaining each item in the tax code calculation
The coding notice provides a note 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.
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. Because of the time lag in establishing that you have underpaid tax for a particular year, the underpaid tax may sometimes be collected in a later tax year, rather than in the current tax year. Any unpaid tax is not formally calculated until after the end of the relevant tax year and so there may be a delay in collecting it.
For example, if you are owing £47 for the 2016/17 tax year, the calculation box on the 2018/19 PAYE coding notice would look like this:
|This is how we worked out your tax code(s):|
|personal allowance||11,850 (go to Note 1)|
|reduction to collect unpaid tax £47||235 (go to Note 2)|
|Total tax free amount||£11,615 (go to Note 3)|
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).
If HMRC reduced your personal allowance by £47, then you would only pay additional tax of £9.40.
Tax free pay and tax rates
The final numbered note on your coding notice tells you:
- the employment income you can receive in the tax year before you start to pay
how your tax-free pay has been allocated to your employment(s);
- the maximum amount of income that can be taxed at 20%;
- when higher or additional rates of tax would start to be charged.
Finally you may see a ‘special note’. This note could ask you to check that your employer is not incorrectly deducting NIC 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.
For more information on common entries on PAYE coding notices, go to the GOV.UK website.
As noted above, PAYE does not always result in you paying the correct tax by the end of the year. Checking your coding notices (as explained above) should help to minimise any problems, but you might still receive a tax calculation – a form 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 it 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.
Here are some examples to help put numbers to the situations outlined above. Please note that for the sake of simplicity, many of these examples ignore NIC, which may also be payable.
Jake works for the local leisure centre in Wales. 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 is taxed at the basic rate of 20% so Jake actually gets £160 in his hand.
Milly has a job in a factory and lives in England. She has other income as well, which uses up her personal allowance. Milly has received a coding notice showing that her employer must operate code 0T against her factory wages. Her pay before tax for 2018/19 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 each month.
If Milly’s factory wages are significantly higher, for example, £4,000 per month, she will pay tax as follows. She pays tax on the first £2,875 each month at 20% (£575), and the remaining £1,125 at 40% (£450). In total she pays £1,025 in income tax each month on her factory wages.
Meena lives in Wales and 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 is taxed at 40%, so Meena receives the net amount of £720 in her hand.
Tim, who lives in England, earns £14,300 a year from his job before any tax is taken off. He is paid weekly and his code number for 2018/19 is 205L. His tax code has been reduced because he has non-cash employment benefits of £9,800 to pay tax on.
This means Tim has a tax-free amount of allowances through the payroll 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 duing 2018/19 is £2,450.
The tax he pays each week is £2,450 divided by 52 = £47.12.
At the end of the tax year, we can see that the PAYE system has done what it should have done:
|Less: Personal Allowance||11,850|
£12,250 x 20% = £2,450
Heather earns £6,000 a year before tax, she lives in Wales. She is paid monthly and has a code number of 460L. This means that Heather has tax-free allowances to take off her pay of £4,600. Her tax code has been reduced because she has non-cash employment benefits of £7,250 to pay tax on.
|Pay from employment||6,000|
|Take off tax free amount of allowances||4,600|
|Wages on which Heather pays tax||1,400|
|£1,400 @ 20% basic rate||£280|
So the tax to be paid by Heather during 2018/19 is £280.00.
The tax she pays each month is £280 divided by 12 = £23.33.
At the end of the tax year, we can see that the PAYE system has done what it should have done:
|Taxable state benefits||7,250|
|Less: Personal Allowance||11,850|
|£1400 x 20% = £280|
Jay lives in Wales and receives wages of £12,000 before any tax is taken off. He is paid monthly and his code number for 2018/19 is K120.
This is worked out by adding up his allowances which are:
|Tax deductible job expenses||465|
|From this we take off any deductions:|
|Tax underpayment from an earlier year||7,015|
This means that Jay has minus allowances of £1,210 (12,315-13,525), which is treated as additional income. His code number is then £1,210 divided by 10 = 121 minus 1 so K120.
|Add on extra income||1,200|
|Wages on which Jay pays tax||£13,200|
|£13,200 @ 20% basic rate||£2,640|
So the tax to be paid by Jay during 2018/19 is £2,640.
The tax he pays each month is £2,640 divided by 12 = £220.
Emily works for a single employer in England, but her earnings vary 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 £11,850 for 2018/19. This makes her code 1185L, which her employer uses 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.
She starts off in April with £988 of allowances (£11,850 divided by 12). She earns only £918 in this month, so she pays no tax and has £70 of allowances spare – these can be used against May’s wages.
In May, she gets another £988 of allowances, so she can earn £1,058 in May without paying tax. But in fact she earns only £918 again, so she then has £140 of allowances spare to use against June's pay.
By adding that £140 left over from May to June’s £988 allowance, she can earn £1,128 this month without paying tax.
But she works extra hours in June, earning £1,208. She only has £1,128 of allowances, so she has to pay tax on £80. The tax rate is 20% so her employer deducts £16 tax (£80 x 20%).
In July, she works fewer hours, only earning £818, but because she gets another £988 of allowances, she has £170 spare. Because Emily is on a cumulative tax code, the extra £80 that was taxed in June can now use up some of those spare July allowances. Her employer gives her back the £16 she paid last month as a tax refund. She is then left with £90 (£170 - £80) of spare allowances from July to add to August’s £988 allowances.
And so it goes on throughout the year.
Janna, who is 20, works at a supermarket for eight hours a week over two evening shifts. She is paid £6.20 an hour and, over the course of the year, she estimates she will earn £2,500 in that job.
On 1 July, she gets a job at a local bar, working at weekends for 12 hours each week, at £6.50 an hour. She estimates that, by the end of the current tax year, she will have earned around £3,000 in that job.
Overall, she estimates her income in the tax year will be £5,500, which is below her 2018/19 personal allowance of £11,850.
She contacts HMRC asking them to split her allowances so that she should not have tax deducted by either employer.
For more information on understanding your coding notice, visit the GOV.UK website.
For an explanation of various common entries on coding notices, go to the GOV.UK website.
If you do not understand your tax code or think that it is wrong, contact HMRC.