Understanding tax codes and tax forms
In this section:
- Tax codes - the basics
- Understanding your PAYE coding notice
- Pensions, state benefits and 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 payer 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).
Your PAYE Coding Notice entries
Entries fall into two key groups which together influence how much tax you will pay on your income.
Allowances and reliefs
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
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
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
Why items that reduce your tax-free amount are taken away 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 what income you're entitled to receive without paying tax and 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.
Common 'allowance' entries explained
Personal Allowance
This is the amount of taxable income that you can receive tax-free in the current tax year.
Check how much Personal Allowance you should be getting
Blind Person's Allowance (BPA)
This is a flat rate tax-free allowance. If you're entitled to it, it should show on your Coding Notice after the Personal Allowance.
Check the current rate for BPA
Married Couple's Allowance (MCA)
MCA (where you or your spouse or civil partner was born on or before 5 April 1935) is an allowance that reduces your tax if you're a taxpayer. The note on your Coding Notice will tell you what MCA is worth to you in terms of a tax reduction and how your tax code number has been adjusted upwards to give you the correct relief.
Check how your MCA entitlement is worked out
Maintenance Payments Relief
As with MCA, Maintenance Payments Relief (where you or your spouse or civil partner was born on or before 5 April 1935) is an allowance that reduces your tax if you're a taxpayer. The note on your Coding Notice will tell you what Maintenance Payments Relief is worth to you in terms of a tax reduction and how your tax code number has been adjusted upwards to give you the correct relief.
Check how your Maintenance Payments Relief is worked out
Other allowances and reliefs
Other entries on your PAYE Coding Notice might include:
- professional subscriptions
- flat rate job expenses (for work tools or specialist clothing)
- other job expenses
- payments towards a retirement annuity
- double taxation relief
- foreign pension allowance
- higher rate tax relief on gift aid payments
- higher rate tax relief on pensions you're paying into
- loss relief
- loan interest
- balance of tax allowances (from another job or pension)
Depending on the type of entry, the effect of adding these amounts to the income you can receive tax-free is one of the following:
- you're not taxed on the income you use to make those payments
- you won't pay tax on some or all of that income
- you'll get tax relief associated with a payment
Items that can reduce your tax-free amount
The negative entries showing on the PAYE Coding Notice take account of amounts of taxable income that we believe you've already received or will be receiving this tax year without tax taken off. They may also include taxable company benefits or tax owed from a previous year.
The amounts we deduct ensure you pay the right amount of tax on these items.
They might include:
Reduction to collect unpaid tax
If you owe tax from a previous year, the easiest way for us to collect this (if it's under £2,000) is to reduce your tax-free allowances by the amount of income on which the outstanding tax is owed. This enables us to collect the correct amount of owed tax through PAYE each week or month. (If you owe more than £2,000 we will send you a tax bill.)
Read more about how we collect 'underpaid' tax through your tax code
'Adjustment' to 20 per cent rate band
You will see this if you have two or more jobs or company pensions at the same time and you pay tax at basic rate (20 per cent) on each - but the level of your income taken together means that you have to pay some tax at the higher rate band of 40 per cent. To collect the additional tax (and make sure you don't end up owing tax at the end of the year) we reduce your tax-free amount for your main job or pension by an amount that has the effect of collecting the additional tax you owe.
State Pension
The State Pension is taxable income, but paid to you by the Department of Work and Pensions (DWP) without tax taken off. To make sure you pay tax on it, we deduct its annual value from your tax-free allowances.
Find out more about the State Pension and your tax code
Other taxable state benefits
If you're receiving taxable state benefits, we deduct their annual value from your tax-free allowances to make sure you pay tax on them. For example, Incapacity Benefit paid after the first 28 weeks is taxable but you receive it without tax taken off.
Find out more about state benefits and your tax code
Taxable company benefits (car, van, fuel, medical insurance etc)
The value of these sorts of benefits (provided by your employer) is taxable so they need to be deducted from your allowances and reliefs.
Find out more about tax codes and taxable company benefits
Gift Aid adjustment
You may see this if you made Gift Aid donations but hadn't paid enough tax to cover the amount the charity will reclaim. The deduction from your tax-free income will make up the difference.
Find out more about how to give to charity through Gift Aid
Income from annuity
If you're receiving taxable annuity payments without tax taken off, we deduct the annual value from your tax-free allowances to make sure you pay tax on this income.
Property income
Any rental income (less allowable expenses) not covered by the Rent a Room scheme is taxable, but you receive it without tax taken off so it needs to appear here.
Interest without tax taken off
An estimate of untaxed interest we expect you to receive will show here to make sure you pay tax on this income.
Savings income taxable at 40 per cent
Savings income is taxed at 20 per cent before you get it and dividends (income from shares) at 10 per cent. If you're a higher rate taxpayer you will owe the difference between 20 per cent and 40 per cent on savings income, and between 10 per cent and 32.5 per cent on dividend income. The amount shown on your Coding Notice has the effect of collecting the difference.
Other pensions/earnings/commission not taxed when you receive them
Our estimate of other untaxed pension/earnings you receive will appear on your Coding Notice. By deducting the value of these from your allowances we will collect the estimated tax due on that pension or other income. If at the end of the tax year it turns out that the amount you received is greater than estimated we'll ask you to pay tax on the difference.
Find out more about other income and your tax code
Other deductions
The above list isn't exhaustive, but covers some of the most common items that reduce your tax-free amount entries. However, the principle applied is the same for all - the amount shown is deducted from your tax allowances and this has the effect of collecting the right amount of tax owed for that item.
Allowances less items that reduce your tax-free amount - possible outcomes
After the deductions are taken away from your allowances, there are three possibilities.
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'.)
If your 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 (PDF 141K)
