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What checks should I carry out on my tax code?

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 (see example coding notice below).

This guide aims to help you to do just that, however if you are concerned, always contact HMRC. You can also view your own tax information online, including your tax code, on the HMRC website. For more information on this, click here.

Example of a pensions coding notice


 What makes up a tax code?


Most people who pay tax in the UK are entitled to personal allowances. These are the starting point for most tax codes. If you have no other income, you can have earnings or pensions up to the amount of your personal allowance without owing any tax.

There may be other amounts to add to your personal allowances to increase the amount you can earn before paying tax (your 'tax free amount') and therefore reduce the tax you have to pay. For example, there may be an amount to be added for certain job expenses (such as using your own car for business), perhaps blind person's allowance, marriage allowance or flat rate expenses for say, uniform cleaning or professional subscriptions.


There may be some items in your tax code that reduce your tax free amount. For example:

  • if you receive a state pension. The state pension is taxable but the Department for Work and Pensions, who pay it, do not operate the PAYE system. The tax due is therefore collected by reducing your tax free amount by the amount of state pension you are entitled to for the year
  •  if you are employed and your employer provides you with benefits, such as private medical insurance or a company car, the value of those benefits is taken off your tax free amount
  •  if you owe tax for an earlier tax year your tax free amount may be reduced so you that you pay it back.
  • if you receive income that 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 income (paid without tax being taken off from April 2016) not covered by the 0% savings rate or by the personal savings allowance, or perhaps receive dividends over the £2,000 allowance (£5,000 16/17 & 17/18), HMRC will reduce your tax free amount by an amount of  the estimated income.

What does the number in your tax code show?

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

HMRC divide the tax free amount by ten and then add on a letter. For example, in 2018/19, someone whose tax free amount is just the personal allowance of £11,850 will have a tax code of 1,185L.

See ‘K codes’ below to find out what happens when the reductions to your tax free amount are more than your personal allowances.

Letters in tax codes

The letters used in tax codes often will not mean much to you. Most are there for HMRC or your employer or pension provider to refer to.

Personal allowances and tax rates may change. Rather than issue new tax codes to millions of people, HMRC will tell employers and pension providers to simply increase by a certain amount all codes ending in, for example, the letter L.

These are the letters used in tax codes:

  • L         standard tax-free personal allowance
  • T         your code will not change until it has been reviewed by HMRC
  • M         you have received 10% of your spouse’s personal allowance
  • N        you have donated 10% of your personal allowance to your spouse
  • BR      no surplus allowance and income from this source will be taxed at the basic 20% rate
  • 0T      As BR, but tax will be taken at 40% and 45% if the income enters those tax bands
  • X         HMRC will review the tax paid at the end of the tax year
  • K         indicates a negative amount of tax free allowance and that tax has to be paid on this amount
  • NT       you will not pay tax on this income
  • DO     tax will be deducted at 40%
  • S         you are resident in Scotland

Note - Scotland has some new codes to accommodate the new tax rates - SBR 20%, SDO 21%, SD1 41%  and SD2 46%

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 2018/19, 20%) and is usually used for a second employment or pension where there is no tax free amount available to reduce your tax deductions. It is different from code 0T. With code BR, tax will only be deducted at basic rate at this job or pension, no matter how much you are paid. But where code 0T is used, tax at the higher and additional rates can be deducted once your income goes over a certain amount.

Code D0

This code is used if all income from this employment or pension is expected to be taxable at 40% (the higher rate). There will usually be another employment or pension where your tax free allowances are given and where at least some of your tax will be deducted at 40%.

Emergency tax codes

When you start a new employment or pension your employer /pension provider will follow the PAYE procedures to issue you a tax code which will be operated until HMRC issue the correct code.

This is a complicated process and one that continually fails. It is important that you check that the proper tax code has been issued by HMRC and is operated. Never assume that the initial code is correct.

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 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.

Tax can become more difficult in retirement and most pensioners have several sources of income. They also receive the taxable state pension which isn't taxed at source. 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.  If you do not receive one contact HMRC on 0300 200 3300 to ask for a copy.

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 (click on each to see an annotated example of how to check your coding notice).

Your circumstances can change during the tax year so your tax code can be amended at any time and a new PAYE coding notice sent to you. Keep all your coding notices to check that HMRC have calculated your tax code correctly and that your employer or pension provider is using the correct tax code for you.

Checking your PAYE coding notice

HMRC  re designed the coding notice in 2015 and they now include all of your sources of income on one document. This much easier to read but you still need to check that the information is correct.

PAYE codes are generally notified to employees by a paper 'coding notice' sent through the post. But if you fill in a tax return each year and are registered for Self Assessment Online, or you have a personal tax account you can also view your PAYE Codes online. Before you can use this service, you must have registered for HMRC Online Services and enrolled for Self Assessment Online.
Each PAYE coding notice can be split into roughly four sections for checking:

  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 information

This first section will contain: your title (Mr, Mrs, Dr, Sir etc), your name and address, your national insurance number, the date of issue of the notice and the tax year to which it relates.

How HMRC have calculated your tax code

In the next section called 'This is how we worked out your tax code'  HMRC will first set out your personal allowances and anything else that increases your tax free amount, such as job expenses or the marriage, married couple's and blind person's allowance. These items are then added up giving the 'total' allowances.

Then, anything that reduces your tax free amount, such as the state pension, a reduction to collect unpaid tax or an estimate of untaxed interest or an underpayment for a previous year is then taken off leaving your 'total tax free amount'.

This 'total tax free amount'  is then set against your income sources until it is used up. The tax code is then shown to the right hand side of the notice, calculated as below;

This leaves you with a 'total 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.

Once the 'total tax free amount' is used up subsequent sources of income will be taxed at BR (basic rate taxpayers)

If you think anything in your tax code is wrong, contact HMRC as soon as possible on 0300 200 3300. Do not expect your employer or pension provider to do this for you, they only act on HMRC instructions.

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 - Age Related Allowances (up to 2015/16)

If you were born before 6 April 1938 and your income is more than £27,700, 2015/16, Gift Aid payments reduce your total income for the purposes of calculating your age-related personal allowance, meaning you pay less tax. This means that an 'estimated income' figure on your coding notice should have been calculated deducting Gift Aid payments.

There is a snag. As Gift Aid payments are treated as paid after basic rate tax (20% for 2015/16), 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.

This section does not apply from 6 April 2016.

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 owe £47 for the 2018/19 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)

Your personal allowance (after increases) £11,850 Go to note 1
Adjustment to collect unpaid tax (£47) £235 Go to note 3
Total  tax free amount £11,615

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, your tax relief for married couple’s allowance will be £8,695 at 10% = £869.50.

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

This is how we worked out your tax code(s)

Your personal allowance £11,850 Go to note 1
Married couple’s allowance  (add)    £4,348 Go to note 3
Less state pension £7,865 Go to note 3
Total tax free amount £8,333

Having £4,348 in your coding reduces the tax you pay, at 20%, by £869.50. This is the same result as £8,695 at 10%.

Marriage allowance

If you are in receipt of the marriage allowance from your spouse your personal allowance will be increased by £1,185, 2018/19. Their personal allowance will be reduced by the same amount.

The calculation box in your coding notice would look like this

This is how we worked out your tax code(s)

Your personal allowance £11,850 Go to note 1
Marriage allowance  (add)    £1,185 Go to note 3
Less state pension £7,865 Go to note 3
Total tax free amount £5,170

Tax free pay and tax rates

The final note on the coding notice tells you:

  • the amount you can earn or the pension payment you can receive each month or week before you start to pay tax
  • the maximum amount of income that can be taxed at 20%
  • when higher or additional rates of tax would start to be charged.


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