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. On this page we look at what PAYE is and how it is applied to you through a notice of coding issued to both you and your employer.
What is PAYE?
HM Revenue & Customs (HMRC) issue a PAYE code to your employer, to tell them what tax-free earnings you are entitled to in a particular pay period, so that tax at the appropriate rates may be calculated on the balance. Your employer is not told how this code has been calculated.
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. Even if you do not get a P2, you should be able to view your PAYE tax code in your Personal Tax Account or if you fill in a tax return each year and are registered for Self Assessment online, you should be able to view your PAYE coding notices online.
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. 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. There is information on what happens when you start to receive a pension and other pensioner-specific issues in the pensioners section.
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.
See the page How is my tax collected? for more information on the PAYE system.
How does PAYE work?
There are three parties involved in the PAYE process – HMRC, your employer (or pension provider) and you.
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); and
- 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.
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; and
- that your employer (or pension provider) is using the correct tax code for you.
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 GOV.UK.
Most people who pay tax in the UK are entitled to tax-free 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 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 period, your tax-free amount may be reduced so that you pay it back (for more on the adjustment that is made to collect unpaid taxes see How do I check my coding notice? below).
- if you receive income that it is not possible to tax before you receive it, your tax-free amount may be reduced by an estimate of that income. For example, if you rent out a property and are not otherwise required to submit a Self Assessment tax return, 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 drop the last digit of the tax-free amount and then add on a letter. For example, in 2020/21, someone whose tax-free amount is just the personal allowance of £12,500 will have a tax code of 1250L. If you are an employee, this code will tell your employer that you are entitled to £12,500 tax-free pay per year, £1,042 tax-free pay per month or £240 per week. Remember if you are a Scottish taxpayer, your tax code will start with the letter ‘S’; if you are a Welsh taxpayer, your tax code will start with the letter ‘C’.
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 tell employers to simply increase by a certain amount all codes ending in, for example, the letter L. For example, in 2019/20 when the personal allowance increased from £11,850 to £12,500, HMRC would have sent a bulletin to all employers telling them to increase the numbers for anybody on an L code by 65.
You may come across the following letters in tax codes:
|C||From 6 April 2019 you should find this at the start of your tax code if you are a Welsh taxpayer. This allows an allocation of the total tax paid to be made to the Welsh government|
|L||You might find this at the end of your tax code if you are entitled to the basic personal allowance, for example, 1250L|
|M||You might find this at the end of your tax code if your spouse or civil partner has transferred £1,250 of their personal allowance to you using the marriage allowance. Although this is not strictly an extra allowance in your hands, this adjustment to your code number should produce a similar effect|
|N||You might find this at the end of your tax code if you have transferred £1,250 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:
What special tax codes are there?
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 drop the last digit of the minus allowance, 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, no tax code can take tax of 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 (or CBR for Welsh taxpayers)
Code BR stands for basic rate – 20% in 2020/21. HMRC usually use this code for a second employment or pension where 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.
However 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.
Note that code BR 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.
Code D0 (or CD0 for Welsh taxpayers)
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.
This code applies the Scottish basic rate to your income – 20% in 2020/21. 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 2020/21. It is used for Scottish taxpayers in a similar way to the BR code described above for taxpayers in the rest of the UK.
You can see an example of this code at example Malcolm.
You can find more information on other special tax codes on GOV.UK.
What happens when I start a new job?
For employees there is a procedure in place when starting a new job, which helps ensure PAYE continues to work on the correct basis, as far as possible. Your new employer has to follow a new starter process which normally involves them gathering information from you, such as from the form P45 given to you by a previous employer, or by asking you to complete a new starter checklist.
When you leave a job, your employer should complete form P45. Form P45 shows your total pay and 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 the Part 1 P45 information to HMRC immediately or as soon as possible after the last pay date. The employer should give Parts 1A, 2 and 3 to you as soon as possible.
When you start a new job, if you have a form P45 from a previous job or from the DWP if you were receiving taxable state benefits, you should give Parts 2 and 3 to your new employer. This enables your new employer to see your previous pay and tax figures, to implement the same tax code you had in your previous job and continue to deduct tax on the correct basis.
If your P45 shows that at your last job you were taxed on emergency code (see below), your new employer will continue using that emergency code until HMRC issue a new code number.
If you do not have a form P45, your new employer should ask you for a ‘new starter checklist’. This allows your new employer to implement an emergency tax code process – this enables them to pay you without a proper code in place. It is important to complete the new starter checklist as accurately as possible or you may end up paying too much or too little tax.
What is an emergency tax code?
If you are undergoing the new starter checklist procedure (see below) your employer will use an emergency tax code.
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 2020/21 is 1250L, which is actually the same as the normal code for the vast majority of people.
What if I start a job without a form P45?
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 a new starter checklist or 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, works pension or private pension.
B. 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, works pension or private pension.
C. You have another job and/or receive a state, works or private 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, postgraduate loan or a mixture of 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 Loans 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. Instead, you can confirm that you are making repayments direct to the Student Loans Company by agreement. We cover this in more detail in our student loans section on our sister website Tax Guide for Students.
Depending on your answers to the new starter questions, your employer will use one of the following PAYE codes:
Category A: one that gives you the full benefit of your personal allowance since the beginning of the tax year, sometimes described as a cumulative tax code;
Category B: 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;
Category C: code BR which means you pay tax at the basic rate, currently 20%, on all of your wages.
You should keep a copy of the information that you provide to your employer in case, later, there is a dispute.
Category B is usually the one that is most confusing.
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, 1250L W1 or 1250L M1. In these situations PAYE is operated non-cumulatively, which means you do not get the benefit of your unused personal allowance since the start of the year.
Instead, you will be getting some benefit of the personal allowance each pay period, but the likelihood of there being a significant over or underpayment of tax at the end of the tax year is reduced.
So, for example, normally if someone has not worked since the beginning of a tax year and gets a job on 1 September, they will be allowed £6,250 (approximately six months x £1,042) of tax-free allowance to use against that month’s wages. But if they are on a non-cumulative tax code, they will only receive one month’s worth – £1,042 – of personal allowance to use against that month’s wages.
Your employer will continue to use the emergency Week 1/Month1 code until either:
- HMRC 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.
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.
You can see an example of how to complete a new starter checklist in our useful tools pages.
Why has my tax code changed part way through the tax year?
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 benefits information for the previous year to HMRC;
- you request tax relief through your tax code for employment expenses, for example;
- you were on an incorrect tax code earlier in the tax year.
With regards to the last bullet point, if you have not been paying enough tax through your original tax code, HMRC may have to change your tax code part way through the year to try and collect the estimated underpayment. 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. 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. See also the question directly below.
What can I do about underpayments that are being collected through my tax code?
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?.
Alternatively, 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.
From 2020 Self Assessment debts are also being included in code numbers, where appropriate.
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.
Who gets a PAYE coding notice?
Although millions of people pay their tax under the PAYE system, not everyone needs a paper or hard copy tax code notification each year (P2).
But you should also be able to view your PAYE tax code in your Personal Tax Account or if you fill in a tax return each year and are registered for Self Assessment online, you should be able to view your PAYE coding notices online.
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.
However, if your tax code is reduced or increased to take account of things like:
- untaxed income, such as rents or savings income;
- underpaid tax from earlier years;
- employment-related benefits, such as company cars or medical insurance;
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.
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.
How do I check my PAYE coding notice?
If you receive a paper P2 'coding notice' through the post, 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 check your PAYE code online or via the Personal Tax Account, the layout may be slightly different.
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.
As we have explained above, 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, has the final digit dropped off. 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 has the final digit dropped off, 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 1250L, 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 1250L and the other has code BR or 0T, you are more likely to be paying approximately the right amount of tax.
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.
For example, if you are owing £47 for the 2019/20 tax year, and you pay tax at 20%, the calculation box on the 2020/21 PAYE coding notice would look like this:
This is how we worked out your tax code(s):
|Personal allowance||£12,500 (go to Note 1)|
|Reduction to collect unpaid tax £47||£235 (go to Note 2)|
|Total tax-free amount||£12,265 (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 (£47 x 20%).
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 tax
how your tax-free pay has been allocated to your employment(s);
the maximum amount of income that can be taxed at various tax rates;
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 GOV.UK.
How do I get my coding notice changed?
The first thing to remember is that your employer cannot change your code number until they receive notification from HMRC. So you need to contact HMRC to explain why the code needs to be changed.
You can do this in a number of ways, but normally doing this online should get faster results:
- You can use the facility called Check your income tax for the current year in your Personal Tax Account. You can then explore your tax-free amount and have individual entries changed.
- You can contact HMRC by phone or letter using the contact details on GOV.UK.
What happens at the year end?
As long as you are employed at 5 April, the end of the tax year, your employer will give you an ‘end of year certificate’ – form P60 or its equivalent – by 31 May. This shows your pay and the tax deducted in the tax year, and possibly any pay and tax from an earlier employment in the same tax year.
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 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.
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 this might not be correct and you will need to take action.
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 is a Welsh taxpayer and 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 CBR 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 after tax of £40, 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 2020/21 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 £3,125 each month at 20% (£625), and the remaining £875 at 40% (£350). In total she pays £975 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%, meaning tax of £480, so Meena receives the net amount of £720 in her hand.
Malcolm, who lives in Scotland earns £26,000 from his main job but has taken on a new job in a coffee bar one evening a week that pays him £50. This new job is allocated a code of SDO, meaning Scottish intermediate tax is deducted from these earnings before he gets them. Malcolm takes home £39.50 each week, after tax of £10.50 has been deducted (£50 x 21%).
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 2020/21 is 205L. His tax code has been reduced because he has non-cash employment benefits of £10,450 to pay tax on.
This means Tim has a tax-free amount of allowances of £2,050 (the personal allowance of £12,500 less £10,450).
The tax code of 205L basically tells his employer the following:
|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 2020/21 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||£12,500|
Tim’s actual tax liability is £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 C460L for 2020/21. 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 £7,900 to pay tax on.
The tax code of C460L basically tells her employer the following:
|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 2020/21 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:
|Non-cash employment benefits||£7,900|
|Less: Personal Allowance||£12,500|
Heather’s actual tax liability is £1400 x 20% = £280
Jay lives in Northern Ireland and receives wages of £12,000 before any tax is taken off. He is paid monthly and his code number for 2020/21 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 (£1,403)||£7,015|
This means that Jay has minus allowances of £1,210 (£12,965 - £14,175), which is treated as additional income. His code number is then £1,210 with the final digit dropped = 121 minus 1 so K120.
The tax code of K120 basically tells his employer the following:
|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 2020/21 is £2,640.
The tax he pays each month is £2,640 divided by 12 = £220.
At the end of the tax year, we can see that the PAYE system has done what it should have done (more or less):
|Less employment expenses||£465|
|Add car benefit||£7,160|
|Less: Personal Allowance||£12,500|
Jay’s actual tax liability is £6,195 x 20% = £1,239
Plus prior year underpayment of £1,403 gives total tax liability of £2,642
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 £12,500 for 2020/21. This makes her code 1250L, 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 £1,042 of allowances (£12,500 divided by 12). She earns only £972 in this month, so she pays no tax and has £70 of allowances spare – these can be used against wages in future periods.
In May, she gets another £1,042 of allowances, so she can earn £1,112 in May without paying tax. But in fact she earns only £972 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 £1,042 allowance, she can earn £1,182 this month without paying tax.
But she works extra hours in June, earning £1,262. She only has £1,182 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 £872, but because she gets another £1,042 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 £1,042 allowances.
And so it goes on throughout the year.
Janna, who is 20 and lives in England, works at a supermarket for eight hours a week over two evening shifts. She is paid £6.50 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 £7.00 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 2020/21 personal allowance of £12,500.
She contacts HMRC asking them to split her allowances so that she should not have tax deducted by either employer.
Where can I find more information?
For more information on understanding your coding notice, visit GOV.UK.
For an explanation of various common entries on coding notices, go to GOV.UK.
If you do not understand your tax code or think that it is wrong, contact HMRC.