A definitive list of tax codes – and what they mean

Income Tax collected through the PAYE system represents the largest single source of government funding. This year HMRC expects to collect £228bn through PAYE. Add to that most of the £172bn from National Insurance Contribution and it makes up around 40 per cent of all tax receipts. 

The successful operation of PAYE is therefore vital to the economy, and yet HMRC plays only a minor role because employers act as their unpaid tax collectors. The mechanism for achieving this is through tax code notifications, which most of us will have been receiving in the last few weeks. 

Please do not ignore them. Recent research found that up to 14 million people have been paying the wrong amount of tax due to coding errors, usually paying too much. 

Life has become far more complicated since the PAYE system was introduced in 1943, with multiple income sources often involved. I see it as a shared responsibility between you, your employer and HMRC to get it right.

If your tax code is too low, your income will be cut by tax that you will then need to claim back later – which can be a lengthy experience.

If, however, it is too high, you will may face an unexpected tax bill when HMRC reconcile the numbers. So it is worth trying to get your code correct, even if it means a battle with the HMRC phone service to do so.

HMRC carries out a reconciliation at the end of each tax year and, together with self-assessment, it should correct itself eventually. Nevertheless, it is better to get it right at the outset.

It can be a particular problem for pensioners who may receive a private pension, state pension, part-time earnings, annuity and savings income. The triple lock increase of 10.1% this year will have meant some pensioners being notified of lower tax codes with additional tax taken from PAYE sources.  

The state pension is taxable income, but tax cannot be collected on it directly through the PAYE system. I have a concern that with personal allowances frozen we may have reached the stage where some recipients of the state pension with additions such as SERPS have insufficient allowances to cover it. HMRC are already struggling with their Making Tax Digital project – and this could add to their woes.

List of UK tax codes and what they mean 

The basic rule is that your PAYE code is the amount of your tax free allowance with the last digit removed, followed by a letter. Someone with a personal allowance of £12,570, unchanged from last year incidentally, and with no other complicating factors, will have a code 1257L. 

From then on it becomes more complicated. 

How are tax codes worked out?

The tax code is designed to allow the PAYE system to collect the correct amount of income tax over the year by adjusting for your individual circumstances. If you have a single source of earnings the code will typically start with your personal allowance and then be adjusted downwards for employee benefits such as a company car or private health insurance. 

It could also be reduced if you have savings, rental profits or dividends above their respective annual allowances. 

The code can be increased for allowable expenses and higher rate relief on charitable contributions. The adjustments will only be made to your main PAYE source of income. 

If you have supplementary sources these will usually be allocated a basic rate BR, Higher rate D0 or additional rate D1 code. 

The code on your main source will then be adjusted accordingly. In these circumstances you may find that you still finish up with an over or under payment when there is the year end reconciliation, or through self-assessment. 

K codes can be confusing, but in essence they are just negative allowances where an amount is added to your income for PAYE purposes. 

This can happen if you lose personal allowances because your income is over £100,000 or where pensioners receive the state pension and have other earnings or private pensions and annuities.

How to check your tax code

Your notice will tell you how HMRC have worked out your code. This will be supplemented with notes. These will explain all the adjustments arising from issues such as those mentioned above. 

Allowances and benefits should be straightforward, but adjustments to rate bands are less easy to understand. If you previously had an underpayment of up to £3,000 you may have asked HMRC to collect this through an adjustment to your code in the following year.  

For example, if you owed £400 from a previous year and are a higher rate taxpayer, your code calculation would be reduced by £1,000.

What is an emergency tax code?

If you change jobs your employer should provide a form P45 to give to your new employer. If they do not, or you were not previously employed, an emergency code will apply. This will be 1257W1 or 1257M1, depending whether you are paid weekly or monthly. If the P45 arrives later you will receive a replacement code.  

What can I do if I have the wrong tax code?

If you think your tax code is wrong you can use the HMRC check your Income Tax online service to update your employment details and tell them about and other changes in your circumstances. 

Alternatively you can write to HMRC quoting your PAYE reference number and ten digit Unique Tax Reference (UTR) number.