3 Mins
Every tax year, employers are advised by HMRC about understanding their PAYE tax code to determine the tax that must be deducted from each of their employees’ salaries via PAYE (Pay As You Earn). The PAYE deducted each pay period is based on the individual’s PAYE tax code.
A PAYE tax code informs the employer of the net tax-free allowance available to the employee in any pay period, but not how that allowance has been calculated. Understanding your PAYE tax code is essential; the full breakdown is sent to the employees only, and it is therefore the responsibility of the employee to ensure the PAYE code is correct, as the employer must use the tax code that HMRC has provided for the employee.
In many cases, provided the tax code is correct and/or the employee has no other taxable sources of income, they (employees) will not be required to submit a tax return at the end of the tax year. If a tax code is incorrect, it may result in a tax refund being missed or a sizeable and unexpected tax liability.
If an employee thinks that their tax code is incorrect, they can notify HMRC. Understanding your PAYE tax code will help in notification; it can be made online, in writing or via telephone. If HMRC agrees, the tax code will be adjusted and the employer will be notified in writing of the change – the employee will also be sent an adjusted tax code. If necessary, the employee can appeal.
What makes up a PAYE code?
The most common PAYE code is 1257L. The numbers (1257) detail the amount of the personal allowance available; in this example, it is the full personal allowance of £12,570. Understanding your PAYE tax code and the various letters that can appear details each individual’s circumstances. The most common are detailed in the following table:
| Letters | Meaning |
|---|---|
| L | You’re entitled to the standard tax-free Personal Allowance |
| M | Marriage Allowance: You’ve received a transfer of 10% of your partner’s Personal Allowance |
| N | Marriage Allowance: You’ve transferred 10% of your Personal Allowance to your partner |
| T | Your tax code includes other calculations to work out your Personal Allowance |
| K | You have other income (not taxed elsewhere) that exceeds your personal allowance |
| 0T | Your Personal Allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code |
| BR | All your income from this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension) |
| D0 | All your income from this job or pension is taxed at the higher rate (usually used if you’ve got more than one job or pension) |
| D1 | All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension) |
| NT | You’re not paying any tax on this income |
| S | Your income or pension is taxed using the rates in Scotland |
| C | Your income or pension is taxed using the rates in Wales |
| M1/W1/X | These are emergency tax codes and appear at the end of the Tax Code not the start |
HMRC has a comprehensive breakdown of the letters in the PAYE codes, which can be found here.
If you have any questions regarding the tax code you have been issued, speak with your tax advisor. Alternatively, if you do not have one, our Payroll team at Henderson Loggie will be able to help.