PAYE Coding Notice: A guide to understanding your tax code

What is a PAYE Coding Notice?

PAYE Coding Notices are a longstanding tool used by HMRC to ensure that the right amount of tax is deducted at source from employment and pension income.

However, the ever-changing landscape of taxation has meant that PAYE Coding Notices are not always as simple as you would hope.

More and more we are seeing that HMRC want ‘Real Time Information’ (RTI) regarding taxpayer’s affairs across several areas and coding notices are a perfect example of this.

As the employer or pension provider declares RTI to HMRC each time they make a payment, the coding notice is ‘live’ and can be updated as many times as needed throughout the tax year to adjust for any changes and to try and ensure the correct amount is collected at source. Without this system, every taxpayer would be required to submit a tax return.

What is included in my code?

The basic structure of your code will be laid out as follows:

If this amount is positive, the remaining allowance will be deducted from your sources of income evenly over the year, before calculating the tax due.

If this amount is negative, it will be added to your income when calculating the tax to deduct so that the additional tax can be collected.

There are letters added to the end of codes which each have a different meaning – The information below has been copied directly from https://www.gov.uk/tax-codes as of January 2021.

• 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
• 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
• S0T – 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
• SBR – All your income from this job or pension is taxed at the basic rate in Scotland (usually used if you’ve got more than one job or pension)
• SD0 – All your income from this job or pension is taxed at the intermediate rate in Scotland (usually used if you’ve got more than one job or pension)
• SD1 – All your income from this job or pension is taxed at the higher rate in Scotland (usually used if you’ve got more than one job or pension)
• SD2 – All your income from this job or pension is taxed at the top rate in Scotland (usually used if you’ve got more than one job or pension)
• C – Your income or pension is taxed using the rates in Wales
• C0T – 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
• CBR – All your income from this job or pension is taxed at the basic rate in Wales (usually used if you’ve got more than one job or pension)
• CD0 – All your income from this job or pension is taxed at the higher rate in Wales (usually used if you’ve got more than one job or pension)
• CD1 – All your income from this job or pension is taxed at the additional rate in Wales (usually used if you’ve got more than one job or pension)
• W1 or M1 or X – These are emergency tax codes

Tax codes with ‘K’ at the beginning mean you have income that is not being taxed another way and it’s worth more than your tax-free allowance. For most people, this happens when you’re:

• Paying tax you owe from a previous year through your wages or pension
• Getting benefits you need to pay tax on – these can be state benefits or company benefits

Why might my code change?

The RTI system means that as soon as HMRC receive data that changes your position, they will update your code to reflect this. Examples of changes can include the following:

• HMRC receive your P11D following its submission in July (at the latest) containing details of your employment benefits.
• You start receiving a new source of PAYE income, either a new employment or pension.
• Your income has increased to move you into the higher rate tax band and HMRC are adjusting to collect this.
• Your personal allowance has increased following the end of a tax year.

What if my tax code is wrong?

If your code is wrong for the full tax year, HMRC should automatically calculate your position at the end of the year and send you a P800 calculation advising of your corrected position.

This can either be a nice surprise (if you are due a repayment) or a shock if you find you have a tax liability owing.  Therefore, it is important to ensure your code is correct.

If HMRC discover an error during the year, they will include an adjustment in your code to resolve this to balance your position.

If you do prepare a tax return, your position will always be corrected (either by an underpayment or overpayment) through your return and the P800 will not be applicable, but it is highly beneficial to have the position correct in the first place.

One thing to watch out for is HMRC carrying forward old information which could have an impact on your code.

For example, if we remember previous times when interest rates were a lot higher, HMRC could have had information regarding interest received and recorded this on their system.

Without any update to this, if you have not had the need to report anything to them since, they may be carrying forward this information and making an incorrect adjustment to your tax code.

If you see something in your code that you are unsure of, it is worth investigating.

What help is available?

There are a number of sources that can help, but for this article we will focus on three; HMRC, your employer / pension provider and Old Mill.

HMRC – they can be contacted by phone, twitter or logging into your personal tax account – https://www.gov.uk/tax-codes/updating-tax-code

Employer / Pension Provider – as they will be calculating the tax due and making payments through the PAYE system, they will be able to confirm to you the code that they are using and what payments are due to be made. They will not be able to explain how your tax code is made up as they do not receive this information from HMRC and they cannot make any changes to your code, but they can be of some assistance to you in the first instance.

Old Mill – if you are a tax return client of Old Mill you will likely know that we review your coding notices when preparing your return and have access to a dedicated agent line with HMRC to update these where required. If we do not have agent authority in place, we can still help and advise on your code and flag any areas that may be causing an issue.

Please see HMRC’s guidance on this matter for more detail – https://www.gov.uk/tax-codes

We hope that this provides a helpful introduction to how tax codes work and the importance of them being accurate.  Please do get in touch with us if you would like assistance.