HM Revenue & Customs (HMRC) use tax codes to tell employers how much tax to deduct from staff wages and salaries. If HMRC does not have enough information to issue a full tax code then the employer will be told to use an emergency tax code until more information is received and the tax code can be adjusted.
Most PAYE codes are made up of a number followed by a letter:
- the letter relates to the type of allowance the employee is getting;
- the number shows the amount of income the employee has as allowances which may be set against tax.
The tax code letter
The letter in the tax code, which shows which tax allowances being received, will be one of the following:
L if the employee is aged under 65 and getting the basic personal allowance. They will be given this code if they are a single person or if they are a person who is being taxed on the emergency code.
P is used if they are a single person, or a married woman or civil partner, aged 65-74 who is entitled to the full age-related allowance (also known as the higher personal allowance).
V is used if the following apply:
- they are a married man or civil partner aged 65 – 74, and
- their wife or civil partner is aged 74 or less, and
- they are entitled to the full age-related allowance, and
- HMRC estimates that tax will be paid at the basic rate.
Y is used if they are aged 75 or over and are entitled to the full age-related personal allowance.
T may be allocated for a number of reasons. These include:
- where it is requested, because the employee does not want to reveal the actual code;
- the employee or partner is aged 75 or over;
- there is a reduced age-related allowance in the code.
K is used if the total tax allowances are less than the total deductions to be taken away from the allowances. If the untaxed income is from benefits in kind, pensions, interest or social security benefits, then a K code may be used.
NT is used if they do not have to pay tax. This code does not include a number.
BR is used if the employee has not been given any allowances and tax will be deducted at the basic rate. This code may be given where they have more than one job.
DO is used if tax is deducted at the higher rate.
OT is where no allowances have been given or remain after other adjustments have been made. Tax will be paid at the basic rate or higher rate, depending on the level of income.
FT is used if the employee is a farm worker under a hiring contract.
The number in the tax code
The number in the tax code represents the total of all available allowances, less any amount to be deducted to cover other income or benefits.
Where to find the tax code
A PAYE tax code will be shown on:
- a notice of coding sent by the employees tax office;
- a pay slip.
Emergency tax codes
The tax office may not be able to give the employer a tax code to allow them to deduct the right amount of tax over the whole year. In this case, the tax office gives the employer an emergency code with which to tax the employee in question. An emergency code assumes that the employee is only entitled to the basic personal allowance and the PAYE tax code will include the letter L, which shows that they are only receiving this personal allowance. It does not take into account any other allowances and reliefs the employee may be entitled to.
The employee will stop being taxed on an emergency code when the tax office sends the employer a correct PAYE tax code and gives the employer details of previous earnings and tax paid in that tax year. This enables the employer or to deduct the correct tax in future and refund any overpaid tax caused by the emergency code. Moving to the correct code may mean the employee may owe tax for the earlier part of the year but HMRC will tell the employer to only deduct reasonable amounts. The employee may therefore have to pay back some tax later on. If at the end of the tax year the employee thinks they have paid too much tax because they have been taxed on an emergency code then they should claim a refund by writing to their tax office.
Alternatively the employee will stop being taxed on an emergency code at the start of the new tax year. In the new year, the employer will usually start deducting tax cumulatively, that is, when deducting tax the employer will take into account the amount of tax the employee has already paid in that year.
Notice of coding
A notice of coding shows an employees tax code if they are going to pay through the PAYE system. The notice is usually sent out in January or February for the tax year beginning on the following 6 April. The code shown in the notice is given for that tax year only. The notes that come with the notice of coding explain how the code is worked out.
Not everyone gets a notice of coding each year. It depends on what allowances and reliefs they are claiming and whether these tend to change from year to year. If the only changes are the increase of allowances in the Budget or any change in the tax rates, the employer will include these automatically in wages and the employee may not get a notice of coding.