The UK tax code - what does it mean?

Around this time of year, HMRC issues tax codes to be used in the new tax year 2023/24. What does this mean for you?

Tax codes for employed individuals

If you are paid through the PAYE (Pay-As-You-Earn) system, your tax code is used to deduct tax from each payment, and usually there's no need to change it.

However, sometimes the code is changed more frequently

Check your tax code

When you receive a notification from the tax office about a new code, check if it's correct. In fact, it's worth doing this periodically, even without information from HMRC.

You will have a separate code for each job you hold, so it's worth checking each one if you have multiple jobs.

You can check your tax code on your first or next payslip (payslip) issued to you after HMRC sends information about a new code – make sure your employer has applied the code change.

How HMRC changes tax codes

As a general rule, HMRC may reduce your tax code to collect tax on PAYE income, for example, from pensions or benefits in kind (benefits in kind).

A code change can also occur when the tax office wants to collect underpaid tax, or tax that the office estimates will become underpaid.

Tax codes are the basis for collecting tax on various incomes. It's important to know that you don't have to agree to pay tax earlier than it is due.

Below are examples of income sources that are often included in tax codes – you can request their removal:

• property rental;
• self-employment;
• taxed investments or dividends;
• untaxed investments (e.g. bank interest).

If your income from one of the above sources does not exceed £500 per year, you can choose to pay tax on it through your tax code; however, you decide this, not the tax office.

Claims for tax allowances made through your tax code

Your basic personal allowance is automatically included in your tax code. However, you may be entitled to more than just one allowance.

This could be an allowance for work-related expenses, or an allowance applicable at a higher tax bracket for pension contributions or Gift Aid payments.

These may not be included in your tax code, but you are still entitled to them – you just need to claim them separately. When?

When is the exact amount of your tax determined?

Your tax code determines how much tax will be deducted from your earnings under the PAYE system. However, this is an estimated value. The exact value is determined when you submit your self-assessment, or, if you are not required to do so – when HMRC verifies your tax returns. So why do you need a tax code?

A correctly determined tax code prevents both large tax overpayments (which then need to be reclaimed) and taxes being set too low, which in turn risks the taxpayer receiving an unexpected tax bill.