Tax codes & PAYE
Understand your tax code
By Ian Robinson
Article 1 of 7
Understand your tax code
Your tax code is used to tell HMRC how much tax you need to pay. Find out what yours means.
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 code is wrong, you could end up paying too much tax.
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, the P60 you get after the end of the tax year and P45 if you change jobs.
The number, 1100 for example, should reflect how much tax-free pay you're allowed to earn in each tax year – £11,000 for 2016-17. 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.
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 10 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 born after 5 April 1948.
- NT: you pay no tax on this income.
- 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.
- M: you will receive extra personal allowance, transferred from your spouse or civil partner (£1,100 in 2016-17).
- N: you have elected to transfer 'unused' personal allowance to your spouse or civil partner (£1,100 in 2016-17).
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.
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.
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 P11D 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.