Tax Codes - The Basics

A tax code is used by your employer or pension provider to calculate the amount of tax to deduct from your pay or pension. If you have the wrong tax code you could end up paying too much or too little tax.

What is a tax code

A tax code is usually made up of several numbers and a letter, for example: 1000L or K497.

If your tax code is a number followed by a letter

If you multiply the number in your tax code by ten, you'll get the total amount of income you can earn in a year before paying tax.

The letter shows how the number should be adjusted following any changes to allowances announced by the Chancellor - common tax code letters are explained below.

Common tax code letters and what they mean
 

Tax codes ending in V are no longer used.

Other tax codes

If your tax code has two letters but no number, or is the letter 'D' followed by a number, it is normally used where you have two or more sources of income and all of your allowances have been applied to the tax code and income from your main job or pension.

Other tax codes and what they mean:

If you have two jobs or pensions, it is likely that all of your second income will be taxed at the basic or higher rate - depending on how much you earn. This is because all of your allowances will have been used against the income from your main job or pension.

How tax codes are worked out

Step one

Your tax allowances are added up. (In most cases this will just be your Personal Allowance and any Blind Person's Allowance. However in some cases it may include certain job expenses.)

Step two

Income you've not paid tax on (for example untaxed interest or part-time earnings) and any taxable employment benefits are added up.

Step three

The total amount of income you've not paid any tax on (called 'deductions') is taken away from the total amount of tax allowances. The amount you are left with is the total of tax-free income you are allowed in a tax year.

Step four

Broadly speaking, to arrive at your tax code the amount of tax-free income you are left with is divided by 10 and added to the letter which fits your circumstances.

For example, the tax code 117L means:

you are entitled to the basic Personal Allowance

£1,170 must be taken away from your total taxable income and you pay tax on what's left

The tax code spreads your tax-free amount equally over the year so that you get about the same take-home pay or pension each week or month.

How the 'K code' works

If your deductions (untaxed income on which tax is still due) are more than your allowances you'll be given a K code, to ensure you pay tax on the excess. Whereas with other tax codes the number indicates the amount of income you can have tax-free, the number in a K code multiplied by ten broadly indicates how much must be added to your taxable income to take account of the excess untaxed income you received.

K code example

K497 means:

your untaxed income was approximately £4,970 greater than your taxable income

as a result, approximately £4,970 must be added to your total taxable income to ensure the right amount of tax is collected
(The actual calculation is more complex and of course precise - and ensures that the exactly right amount is added to your taxable income.)

If you're on an emergency tax code

Sometimes your employer or pension payer will have to use an ‘emergency’ or ‘special basis’ code until we've worked out what your tax code should be. This can happen if you start a new job and don't have a P45 for example. While you're on an emergency code you'll get the basic Personal Allowance - this may or may not be right for you, but the tax code will be reviewed and changed if necessary once we know more about your previous pay and tax. If you have paid too much tax under the emergency code, you will get a refund.

For 2014/15, the Emergency Tax Code is 1000L.

Changes that might affect your tax code
 

You must keep HMRC informed of any change in your circumstances, for example if:

• you get married, form a civil partnership, or separate and either of you were born before 6 April 1935
• you start to receive a second (or third or more) income
• the amount of untaxed income you get increases or reduces

Failure to inform HMRC could result in paying the wrong amount of tax. If HMRC do change your tax code, you should receive a PAYE Coding Notice from your Tax Office. Keep all notice of coding letters for reference in case you have any questions or need to check you are paying the right amount of tax.