Tax codes explained Your tax code

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If your tax code is wrong, you could be paying too much tax

PAYE (pay as you earn) is a system where tax is deducted directly from your earnings or company/private pension before you receive any money. 

HMRC gives your employer or pension provider a tax code to show how much tax-free pay you should get each time you get paid – tax is deducted from anything above this. If your tax code is wrong, you could end up paying too much.

Tax codes explained

A tax code is made up of letters and numbers and is usually shown on your payslip, alongside your pay or pension information. It will also be on the coding notice you get from HMRC and the P60 you get after the end of the tax year and P45 if you change jobs.

The number, 1000 for example, should reflect how much tax-free pay you're allowed to earn in each tax year, £10,000 for 2014-15. As a general guide you need to multiply your tax code by 10 to get the total amount of income you can earn each year before being taxed.

The tax code letter gives your employer further information on the type of allowances you receive or the rate of tax that should be charged (see tax code letters below).

Tax code letters

  • BR or DO All your pay from this source is taxed at the basic rate (BR) or higher (DO) rate. This is because your allowances have already been used up against your other income.
  • K Total deductions exceed your allowances.If the untaxed income on which tax is still due is greater than your annual allowances you'll be given a K code, to ensure you pay tax on the excess. While other tax code numbers indicate the amount you can have tax-free, the number in a K code multiplied by ten broadly indicates how much must be added to your taxable income to take account of the excess untaxed income you received. For more details see HMRC's website.
  • L  You get the basic personal allowance for a person under aged under 65
  • NT  You pay no tax on this income
  • P  You get the full age-related personal allowance for someone aged 65-74
  • T  Used if your tax office needs to review your tax code – for example, if your tax affairs are complex. You can ask for a T code to keep your personal details confidential.
  • V  You get full age-related personal allowance for someone aged 65-75, and married couple's allowance, and you're likely to pay the basic-rate tax
  • Y  You get the full age-related personal allowance for someone aged 75 or over

Your tax code and tax-free allowances

To calculate the proportion of your pay you will get tax-free, first you need to add up the allowances and reliefs to which you are entitled – for example, personal allowance and blind person's allowance. 

Expenses

If you pay certain expenses to enable you to do your job, such as membership fees to a professional or trade organisation, HMRC may also include these in the allowances and reliefs in your tax code.

Fringe benefits

Your tax code may be used to collect tax on fringe (non-cash) benefits from your employment, such as a company car, or income from other sources that is taxable but paid with no tax taken off, such as the state pension. 

These are deducted from your allowances and give you the amount of tax-free pay you are entitled to in a tax year. Your tax code may also be used to collect other tax due – for example, tax that you may have underpaid in previous years or higher rate tax on savings.

Your employer works out how much your taxable benefits are worth and uses form P11 D to tell HMRC. Most employee benefits are declared only if you earn at least £8,500 a year, but some, such as living accommodation paid for by the employer, are taxable even if your earnings are below £8,500 a year. These benefits are reported to HMRC on form P9D. 

Your employer should give you a copy of your form P11D or P9D for your records. Tell your tax office if your circumstances change, as you may be entitled to a new code.

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