Understanding PAYE tax codes

A tax code is usually made up of one or more numbers followed by a letter. The code number tells you the amount of pay you can earn from your job in a tax year before you pay any tax. The tax code spreads this tax-free amount equally over the year so that you get about the same take-home pay each week or month (assuming you earn a regular amount throughout the year). If the tax code starts with a letter or only consists of letters then the code works differently (as described below).

Types of tax code

There are three types of tax code and we set out in the table below what each of these means:-

Type of tax code

What the tax code means

Suffix codes

One or more numbers followed by L, P, T or Y

Example: 345L, 456P or 0T

The number plus ‘9 added to the end’ is the amount of pay you can earn in a tax year before you pay any tax. For example a tax code 508L means that you are entitled to £5,089 of tax-free pay in the tax year.

The letter determines how the number part of your code will be adjusted to take account of any Budget changes that may affect the employee’s tax-free pay.

Prefix codes

Start with D or K

Example K123

The code D0 means you will have tax at the higher rate deducted from all of your pay.

The letter K means you have already used your tax-free allowances for the year. The number plus ‘9’ indicates how much must be added to your taxable income to make sure you pay tax on all the taxable income received. This may mean you end up having tax deducted from your pay at higher rates than normal. Overall, however, an employer is not allowed to deduct more than 50% of your gross pay as tax under a K code.

For example, K123 means £1,239 needs to be added to your taxable income to ensure you pay the right tax.

Letter only codes

BR or NT

BR means tax is deducted at basic rate from your salary with no allowances given.

NT means you won't have any tax deducted from your pay. (Note: This will not normally result in any refund of tax previously deducted from your pay before the NT code was issued, unless your HM Revenue & Customs office specifically tells your employer to make a refund.)

Week 1/month 1 tax codes

Most tax codes have the effect of deducting tax evenly over the full tax year – that way your take-home pay doesn’t change much from week to week or month to month.

However, sometimes your employer will have to use a special method of working out your tax deductions - called a 'Week 1' or 'Month 1'. With this method, all previous pay and tax in the year is ignored. The final position will be sorted out with HM Revenue & Customs at the end of the tax year.

A Week 1 or Month 1 basis is used if:

HM Revenue & Customs tell your employer to use it

They issue a code that says Week 1 or Month 1 - for example 522L M1 or 522L W1

You have given your new employer a P45 with a Week 1 or Month 1 code on it

It's the 53rd pay week in a tax year

Emergency tax code

HMRC make your employer operate an emergency tax code when your have ticked box "B" on a form P46 (where you start a new job without a P45).

The code, which is a number followed by the suffix L, is set each tax year and is the current tax year’s Personal Allowance without the final digit.

The emergency tax code can be only be used on a non-cumulative basis week 1 or month 1.

For help please contact:
Mrs Philippa Walker, our payroll manager, on 01323 431200
or email her at p.walker@plummer-parsons.co.uk.