How do tax codes work?

Under PAYE, tax is calculated using tax codes notified by HMRC, and once a code is issued it remains in force until HMRC notifies a change.
Employers have no right to deviate from this procedure or to amend a tax code of their own accord. If you are currently being taxed using a BR (basic rate) code and you think you should have been taxed using D0 (higher rate) code, please telephone the HMRC Employee Helpline and discuss the matter. This process can bring about a satisfactory change in code. Your tax code represents the tax allowances to which you are entitled, less any deduction to cover small items of unearned income, P11D benefits, or to adjust for underpayments in earlier years. The code number is arrived at by dropping the final number from the total of your allowances.

You will be issued with a separate tax code for each employment or pension that you have, and the notification of coding (form P6T) will specify the source of income to which the code is to be applied. When a tax code is changed, HMRC will send you notification of how the code has been calculated, and you should keep these notifications with your personal tax records, checking in particular the source of income to which they relate. Unless we are retained to prepare your personal tax returns, it is not necessary to send us these notifications, or copies thereof, since HMRC should also notify us of your new code (but not how it has been calculated). We would encourage you, however, to check using the online payroll system, that any new tax code has been applied when you receive your next pay-slip, and to contact us if it has not.

The following types of tax code are used, and each has a different significance as follows:

Suffix L – You are entitled to the basic tax-free Personal Allowance

Suffix P – You were born between 6 April 1938 and 5 April 1948 and are entitled to your full tax-free Personal Allowance

Suffix Y – You were born before 6 April 1938 or over and are entitled to your full tax free Personal Allowance 

Suffix T – Your tax code includes other calculations to work out your Personal Allowance (e.g. it’s been reduced because your income is over specific limits.

Prefix D – All your income from this job is taxed at the 40% higher rate for D0 or 45% higher rate for D1 (usually used if you have more than one job or pension)

Prefix K – You have income that isn’t being taxed another way and it is worth more than your tax free allowance. Therefore, your employer or pension provider takes the tax due on the income that hasn’t been taxed from your salary or pension. However, an over-riding regulatory limit is applied so that employers cannot take more than half your pre-tax salary when using a K code.

Code BR – All your income from this job is taxed at the 20% basic rate (usually used if you have more than one job or pension). This code is often applied in similar circumstances to a D code, but where it is judged that the individual will not be subject to higher rate tax

Code 0T – Your Personal Allowance has been used up, or you’ve started a new job without completing the necessary paperwork

Code NT – No Tax is to be deducted

Non-cumulative (Month 1) tax basis

If your tax records are not in order for any reason you may be put on a non-cumulative basis until things have been regularised. This means that you will be restricted to only one month’s tax allowance in each month that you are paid, and if you have overpaid tax earlier in the year, no repayment or adjustment can be made until this restriction has been removed.

The emergency code

The emergency code represents the basic personal allowance on a non-cumulative basis and is used, in the absence of any other code, for an individual’s main occupation, when he has no other source of earned income, until otherwise notified by HMRC.

Pensions and tax allowances

If you are over 50 and are already drawing a pension in addition to a salary from your company, you will normally receive all your allowances through your pension and none through your salary. Your pension thus becomes your ‘main employment’. In these circumstances, you will normally be allocated a code of BR, D0 or D1 if you should be paying higher rate tax, for all other employments.

Amy FowlerHow do tax codes work?