Step one
Your tax allowances are added up (in most cases this will just be your personal allowance and any
blind person’s allowance, in some cases it may include certain job expenses).
Step two
Income you’ve not paid tax on (for example untaxed interest or part-time earnings) and any taxable employment benefits are added up.
Step three
The total amount of income you’ve not paid any tax on (called ‘deductions’) is taken away from the total amount of tax allowances (worked out as above). The amount you are left with is the total of taxfree income you are allowed in a year.
Step four
To arrive at your tax code the amount of tax-free income you are left with is divided by 10 and added to the letter which fits your circumstances.
Example: The tax code 117L means that you are entitled to a personal allowance of £1,170 and therefore, any amounts earned above this threshold in the current tax year will be subject to income tax.
How the ‘K code’ works
If your deductions (untaxed income on which tax is still due) are more than your allowances you’ll be given a K code, to ensure you pay tax on the excess.
The excess tax due is divided by 10 and added to the letter K. So, whereas with other tax codes the number indicates the amount of income you can have tax-free, the number in a K code indicates how much must be added to your taxable income.
K code example
K497 means:
your untaxed income was £4,970 greater than your tax-free allowances as a result, £4,970 must be added to your total taxable income to ensure the right amount of tax
is collected.
If you’re employed or between jobs
Your tax code is written on your P45 (given to you by your employer when you stop working for them). This is why it’s very important to give this to your new employer when you change jobs. If you’ve lost your P45 and want to find out your tax code contact your tax office and give them your National Insurance number and tax reference number.
If you’re starting your first job
If you’re starting your first job and don’t have a P45, your employer will give you a P46 to fill in and sign Your employer will allocate a tax (depending on your circumstances) code and work out the tax due.
HMRC will process your P46 and, where necessary, revise your tax code. If you’ve paid too much tax, your employer will make the necessary repayment. (If the tax year has ended before this is worked out, then HMRC will make the repayment.) If you haven’t paid enough tax your tax code can be amended to collect the underpaid tax (K code).
If you get a company or personal pension
You’ll find your tax code on your ‘notice of coding’ sent to you by your tax office after the start of each tax year (and at other times if your tax code changes). You’ll also find your tax code on notices and payslips from your pension provider.
Changes that might affect your tax code
You must keep us informed of any change in your circumstances, for example if:
you get married, form a civil partnership or separate or either of you was born before 6 April 1935 you start to receive a second income the amount of untaxed income you get increases or reduces.
If you do not do this you could end up paying the wrong amount of tax. If your tax code is changed, you should receive a ‘notice of coding’ from your tax office. Keep all notice of coding letters for reference in case you have any questions or need to check you are paying the right level of tax.
