Meg Saksida explains the basics of the PAYE tax code.
By law, employers in the UK need to deduct income tax from their employees before paying them their wages and salaries through PAYE (pay as you earn). Every individual is different; some will be basic rate taxpayers, others higher or additional rate taxpayers; some will have benefits-in-kind to consider, and others will not.
The tax code is a convenient way to inform the employer or the pension provider of how much personal allowance the employee is entitled to, in order to aid the employer or pension provider in calculating the correct amount of tax.
Why check the tax code?
The tax code of the individual is identified by HMRC, and in doing this, they will usually take account of any tax paid or benefits-in-kind in the previous year as an indication of how much the individual will receive in the current year. The code, once calculated, is then passed on to the employer by HMRC. The individual also receives a copy.
Tax codes can be out of date or incorrect due to human error or when HMRC has wrong or incomplete taxpayer information.
How to check the tax code
Tax codes may be checked on the gov.uk website. Go to ‘check your income tax for the current year’ service.
Both the tax code and the personal allowance can be checked to ensure that both are correctly being used by the employer and HMRC. A taxpayer can also see if their tax code has changed, inform HMRC and their employer of any changes, and see an estimate of how much tax is payable for the tax year based on their tax code.
Tax codes have four numbers and a letter.
The most common tax code for 2021/22 is 1257L. The numbers represent the amount of personal allowance (PA) available to the taxpayer. In 2021/22 the PA is £12,570, and a tax code of 1257 means that the individual has the whole £12,570 available to them. The ‘1257’ is simply the PA less one digit.
If, for example, the taxpayer received medical cover costing £400 from their employer, their PA will be reduced accordingly. The employee’s tax code numbers would then be 1217.
The letter(s) as a suffix
The letter at the end is specific to the individual and could be one of 20 different letters. An L, for example, is a person who is entitled to all of the normal PA, but someone who is perhaps working at a second job where all the income is taxed at the higher rate will have a D0 as the suffix.
A Scottish employee will have an S, and an M would be used for those whose spouse or civil partner has transferred some of their PA to the taxpayer.
A ‘K’ as a prefix
If the tax code has K as a prefix, it means that the additional income needing to be taxed through the tax code is higher than the PA for the year. This often occurs if prior years’ tax is being collected through the tax code, or the taxpayer has an expensive company car or another expensive benefit.
If an employee has a ‘K’ tax code, the employer or pension provider cannot deduct more than half of the individual’s pre-tax wages or pension to cover the tax due.
The tax code will be used every payday by the employer, so it is in the interests of the employee to check that it is right. Any errors could end in either income being lower than it should be and a cashflow disadvantage, or more worryingly, a tax bill collected through a lower tax code in the following years.