PAYE tax PAYE tax codes
We see them on our pay stubs every month - four little numbers and letters next to how much we've been paid. But what does your tax code actually mean?
Tax codes are essentially instructions to your employer or pension provider about how much they should take from your pay or pension to forward to HMRC.
The combination of letters and numbers shows your status and the amount of tax-free allowance - how much you can earn without having to pay tax - you should receive.
PAYE tax code letters
The most common letters you might see in a tax code are:
- L- you get the basic personal allowance. In 2016-17 the full code would be 1100L, resulting in the first £11,000 being paid out tax-free.
- BR - you receive no tax-free allowance and all your income is taxed at the basic rate (20%).
- NT - you pay no tax on your income
- K - total deductions exceed your allowances.
PAYE coding notice
A coding notice is document issued by HMRC giving advance warning of your tax code for the forthcoming tax year, which starts on 6 April.
If you receive income from several sources, you may get more than one notice, with a different figure on each.
Normal practice is for your main employer to use the whole of your tax-free personal allowance and others to tax everything you receive from them - unless you are expected to have unused allowance left over.
For private pension income, your allowance is adjusted to show the amount of state pension you will receive, which is paid with no tax deducted.
Go further: State pension explained - get to grips with how the state pension works and how you receive it
PAYE tax codes and underpayment
A common cause of tax underpayment is that you have two different employers and receive a full tax-free allowance from each of them.
If you have two jobs, or two private pension providers, it is important to check the tax code applied by each of them carefully to make sure your overall combined allowance is correct.
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