In this section:
- Tax codes - the basics
- Understanding your PAYE Coding Notice
- Emergency tax codes
- Company benefits in your tax code
- Expense payments in your tax code
- Pensions, state benefits and your tax code
- Other income taxed through your tax code
- How underpayments of tax affect your tax code
- If you have more than one tax code
- What to do if your tax code is wrong
Understanding your PAYE Coding Notice
Your 'PAYE Coding Notice' tells you what your tax code is and how it's worked out. The tax code tells your employer or pension provider what tax-free income you're entitled to (if any) over the tax year and, as a result, how much tax to take off your income before they pay you. This system of collecting tax is called PAYE (Pay As You Earn).
On this page:
- Your PAYE Coding Notice entries
- Why items that reduce your tax-free amount are deducted from allowances
- Effect of deductions from allowances
- What do you need to do with your PAYE Coding Notice?
- If your PAYE Coding Notice contains wrong information
- More useful links
Your PAYE Coding Notice entries
Your PAYE Coding Notice entries fall into two key groups which together influence how much tax you will pay on your income.
Allowances and reliefs - positive amounts
These are shown as positive amounts and include:
- tax-free allowances (amounts of income that you're entitled to receive tax-free: Personal Allowance and Blind Person's Allowance)
added to
- other allowances or reliefs based on your individual circumstances - which have the effect of reducing your tax bill if you're a taxpayer (for example Married Couple’s Allowance)
If these are the only entries on your Coding Notice, they are deducted from your taxable income (employment, pension and any other earnings/income) and you pay tax on what's left.
Items that reduce your tax-free amount - negative amounts
You may also have negative amounts showing on your Coding Notice.
These are taken away from your allowances and reliefs. Items that reduce your tax-free amount may include:
- taxable income/state benefits/state or other pensions that you already receive without tax taken off
- taxable company benefits that you receive without tax taken off
- unpaid tax that you owe
Common PAYE Coding Notice entries explained
Why items that reduce your tax-free amount are deducted from allowances
The total value of the items that reduce your tax-free amount is taken away from the total value of your allowances and reliefs in order to correct the balance between the following:
- what income you're entitled to receive without paying tax
- what you've already received or are already receiving without tax taken off
By subtracting the items that reduce your tax-free amount we try to make sure that you pay the right amount of tax during the tax year.
After the deductions are taken away from your allowances, there are three possibilities.
Effect of deductions from allowances
If the items that reduce your tax-free amount are less than your allowances
In this case the amount left is income you can still receive tax-free in this tax year. This amount will be taken away from your overall taxable income and you pay tax on the balance.
If the items that reduce your tax-free amount are equal to your allowances
In this case you don't have any tax-free allowances to set against your taxable pay for the year - so you pay tax on all of your taxable income.
If the items that reduce your tax-free amount are greater than your allowances
In this case your allowances are all used up and you will owe tax on the difference between the two. For example, if your allowances are £6,000 and your deductions work out at £6,250 you will owe tax on £250. This amount will be added to your overall taxable income and you'll pay tax on the total proportionately over the year. (We indicate that your allowances are used up and you owe extra tax by giving you a 'K code'.)
What do you need to do with your PAYE Coding Notice?
Your Coding Notice is yours to keep. We tell your employer or pension
provider what your tax code is - we’ll also tell any agent acting for
you.
If your PAYE Coding Notice contains wrong information
If you think that any of the information on your Coding Notice is
wrong (for example, because your circumstances or income have changed,
or we've made a mistake) please contact your Tax Office. If the amounts
are incorrect you could end up paying too much or too little tax. You'll
find the contact details for your Tax Office on your Coding Notice.
You can also search for them online below.
If anything is incorrect we'll issue a new Coding Notice and tax code.
Please contact your Tax Office if you need further explanation of any of the figures on your Coding Notice.
More useful links
Example of a PAYE Coding Notice - 2008-09 tax year (PDF 141K)
What to do if your tax code is wrong
