What is a tax code?
When you receive a payslip, you’ll notice that you’ve been assigned a tax code.
This determines the amount of PAYE (Pay As You Earn) tax you're charged - a system where tax is deducted directly from your earnings or company/private pension before you receive any money.
This guide explains how tax codes work, lists what the tax code letters mean and what to do if you’ve seen a mistake.
List of tax codes
Find out what the letters in your tax code signify and how your tax will be worked out.
You get the basic personal allowance for a person born after 5 April 1948.
In 2018-19, the most common tax code is 1185L, used for most people with one job and no untaxed income, unpaid tax or taxable benefits. This reflects that the personal allowance is £11,850.
You’re given no personal allowance. This happens when you don’t provide your employer with P45 or enough details for them to work out your tax code, or when your personal allowance has been used up by previous income.
BR or DO
All your pay from this source is taxed at the basic rate (BR) or higher rate (DO). This is because your allowances have already been used up, which may happen if you have a second job or receive a pension while working.
All your pay from this source is taxed at the additional rate. This is because all your allowances have already been used up - for instance, if you have more than one income.
Your 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.
Unlike other tax codes, 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.
You are benefiting from the Marriage Allowance, and will receive 10% of your spouse or civil partner’s personal allowance (£1,150 in 2017-18; £1,185 in 2018-19).
You have elected to use your Marriage Allowance to transfer 10% of 'unused' personal allowance to your spouse or civil partner.
You pay no tax on this income. This is only used in very specific cases, such as musicians who are regarded as being self-employed and are not subject to PAYE.
You live in Scotland and pay the Scottish Rate of Income Tax.
This is used if the tax office needs to review your tax code – for example, because your tax affairs are complex, or your estimated annual income is more than £100,000, which would affect the amount of personal allowance you’re entitled to.
You can also ask for a T code to keep your personal details confidential.
W1 or M1
These are emergency tax codes, standing for ‘week 1’ or ‘month 1’ - depending on whether you’re paid weekly or monthly - which can appear at the end of your tax code. These codes indicate that you’re not being taxed cumulatively, but just on the amount you’ve earned in that particular payslip. See our guide on emergency tax codes for more information.
Checking your tax code
Your tax code is assigned by HMRC - it then tells your employer or pension provider which code to use to collect the right tax.
A tax code is usually shown on your payslip, alongside your pay or pension information. It will also be on the coding notice you might receive from HMRC, the P60 you get after the end of the tax year and the P45 if you change jobs.
Every tax code is made up of letters and numbers.
The number, 1150 for example, should reflect how much tax-free pay you're allowed to earn in each tax year – as a general guide, you need to multiply the number by 10 to get the total amount of income you can earn each year before being taxed.
The personal allowance for 2018-19 is £11,850, so the number for many employees is 1185. But in 2017-2018, the personal allowance was £11,500, meaning your tax code may have been different prior to 6 April 2018.
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.
Find out more: tax-free income and allowances - how much you can earn before paying tax
What if you have the wrong tax code?
If you think your tax code could be wrong, you should contact HMRC.
The onus is on you to make sure your tax code is correct. If you’ve overpaid your tax, HMRC will inform you of a refund by post.
You’ll generally be paid back through a tax code adjustment – meaning you’ll pay less tax and therefore receive more of your wages. But if the refund is for a previous tax year, you’ll be sent a cheque.
In the situation where you've underpaid tax, you’ll probably have to pay it back. This could either be done by putting you on an emergency tax code, or by issuing you with a tax bill.
Find out more: income tax calculator 2018/2019 - check how much tax you're meant to pay
Why did your tax code change?
There are a few reasons why HMRC might change your tax code. These include:
- Starting a new job when your new employer doesn’t have a P45: this will trigger an emergency tax code, as there is not enough information to see how much you’ve earned and how much tax you’ve already paid during the tax year.
- Receiving an income from an additional job or pension: if your first job uses up your personal allowance, your second income might be taxed on a different code
- Changing your income: earning more or less can affect how much tax you’re liable to pay.
- Starting or stopping benefits from your job: this could affect how much money you receive in your payslip, therefore changing how much tax you need to pay.
- Starting or stopping taxable state benefits, including the state pension, widow’s pension, widowed parent’s allowance, bereavement allowance, incapacity benefit, employment and support allowance and carer’s allowance.
If you’ve been put on an emergency tax code, HMRC will adjust it once it has enough information to do so. You’ll receive a coding notice to tell you when your tax code has been updated.
Find out more: emergency tax codes – what they are, what they mean and what to do if you’re paying the wrong amount.
What is a PAYE coding notice?
When your tax code is updated, you will sometimes receive a PAYE coding notice in the post from HMRC.
This details the allowances and deductions you are entitled to and which were used to work out your tax code.
You need to check these details carefully, as incorrect information could mean you’re paying the incorrect amount of tax.
Coding notices are usually sent out in January and February, so any changes can be put into effect by the beginning of the new tax year in April. But you may receive a coding notice at another time of the year if the tax rules or your circumstances change.
You may not get a coding notice at all – if the letter in your tax code is L, P, V or Y, your employer can often just alter your code automatically.
If you think your coding notice is wrong, tell HMRC. You can fill out the online form, or call 0300 200 3300.
What if I have more than one tax code?
You’ll have more than one tax code if you have more than one job or pension.
Your personal allowance will be factored into whichever income HMRC considers to be your main income source. You’ll have to make a request to HMRC if you want your personal allowance to be moved to a different job or pension.
You may find that whoever pays your second income is instructed to deduct tax at the basic rate (20%) or higher rater (40%), using the BR or DO code respectively, if you’ve already used up your personal allowance on your first job. This means you’ll pay tax on all of the money you receive.
How do tax-free allowances affect my tax code?
Tax-free allowances can affect the amount of income you receive, and therefore how much tax you have to pay.
These can include:
- Personal allowance
- Blind person’s allowance
- Pension contributions
- Gifts to charity
- Interest payments on qualifying loans
Find out more: Tax reliefs – read about the kinds of payments that can reduce the amount of tax you pay through your income.
Work expenses and your tax code
If you pay certain expenses to enable you to do your job, HMRC may also include these in the allowances and reliefs in your tax code.
You can only claim relief on things that are used just for your work, and which you don’t use in your private life.
You can’t claim for things you’ve spent money on if your employer has provided you with an alternative.
You can claim within four years of the end of the tax year in which you spent the money, but you have to keep records and receipts.
If your employer pays back your expenses, you can’t claim tax relief.
For claims up to £2,500, you can fill in a self-assessment tax return, or use form P87. You’ll usually receive money back through adjustments to your tax code, in either the current tax year or the next one.
For claims over £2,500, you can only claim using a self-assessment tax return. If you don’t usually fill one in, you’ll have to register with HMRC first. You’ll receive tax relief through your tax code for the current and next tax years.
Get a head start on your 2017-18 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.
Fringe benefits and 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, accommodation, loans or medical insurance.
These benefits 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 should give you a copy of your form P11D for your records. You must keep these details for two years after the tax year they relate to.
Tell HMRC if you start or stop getting benefits through your work, as you may be entitled to a new code.