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 links to example coding notices 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 in your Personal Tax Account: www.gov.uk/personal-tax-account.

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 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.

Reductions

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

• if you receive a state pension. The state pension is taxable but the Department for Work and Pensions, who pay it, do not operate the PAYE system. The tax due is therefore collected by reducing your tax free amount by the amount of state pension you are entitled to for the year

•  if you are employed and your employer provides you with benefits, such as private medical insurance or a company car, the value of those benefits is taken off your tax free amount

•  if you owe tax for an earlier tax year your tax free amount may be reduced so you that you pay it back.

• if you receive income that 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, 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 2021/22, someone whose tax free amount is just the personal allowance of £12,570 will have a tax code of 1257L.

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 2021/22, 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 annotated examples of how to check your coding notices).

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