PAYE codes explained

Payslip

Tax codes usually look something like this: ‘BR’, ‘1100L’, ‘NT’, ‘D0’. Not particularly helpful to the untrained eye.

While most people see one appear on their payslip, not everyone knows what it means.

HMRC expects everyone with a PAYE code to check it, so that they know they are paying the right amount of tax, and this article aims to help you do that.

Generally there are two types of PAYE code

The first of these is the most common and is an allowance-amount type of tax code. These contain a figure and a letter. To determine the amount of tax free allowance you have been given, first remove the letter and add a zero to the end of the figure.

For example, the most common PAYE code for 2016/17 would be 1100L, which represents the taxpayer being given allowances of £11,000, the standard amount of personal allowance for the year.
If you have a PAYE code that is not 1100L for 2016/17, it means you have adjustments within your PAYE code to allocate you a different amount of allowances. There are things that can both increase and decrease the amounts of allowances you get.

If this applies, you should check that you are happy with each of the adjustments shown on your PAYE coding notice (these are issued by HMRC). If there is an error, let HMRC know.

It’s possible to have adjustments that reduce your allowances below zero, meaning that rather than deducting an allowance off the earnings and taxing the rest, an amount is added onto earnings, and taxing the total.

These PAYE codes always begin with a ‘K’. For example someone with a K123 code will be given no allowances, but effectively be paying tax on their earnings plus £1,230.

The second type of code is a flat-rate code

These codes mean that all the income from this source will be taxed at the same rate. Usually these codes are the result of multiple sources of income, with another source taking the allowances.

BR      – Basic Rate, all income to be taxed at 20%

D0      – Higher Rate, all income to be taxed at 40%

D1      – Additional Higher Rate, all income to be taxed at 45%

There are exceptions and a couple of commonly encountered ones are worth mentioning.

The first is that some people might find themselves with a BR code, even though they only have one source of income. That’s usually due to the employer not having a code to use yet, instead operating this code as the default (often referred to “emergency tax”).

Finally, the holy grail of tax codes: ‘NT’. This stands for “No Tax” and means the income source won’t be taxed at all. There are a number of reasons this might apply.

Of course, Garbutt + Elliott’s personal tax team can assist with all matters relating to PAYE, and if you would like more information, please contact James May or submit a contact form below.