Tax codes, payslips and deductions: what they mean and how to fix them

Understanding Your Tax Code

Your tax code is a series of numbers and letters used by your employer or pension provider to calculate how much Income Tax to deduct from your pay through the Pay As You Earn (PAYE) system. HMRC provides this code, and it's crucial that it's correct to ensure you pay the right amount of tax.

Decoding the numbers and letters

The numbers in your tax code usually represent the amount of tax-free income you're entitled to in a tax year, divided by 10. For the 2026/27 tax year, the standard Personal Allowance (the amount you can earn before paying Income Tax) is £12,570.

The most common tax code is 1257L. Here's what the common letters mean:

• L: You are entitled to the standard tax-free Personal Allowance.
• BR: All your income from this job or pension is taxed at the basic rate (20%). This is often used if you have a second job or pension and your main Personal Allowance is used elsewhere.
• D0: All your income from this source is taxed at the higher rate (40%).
• D1: All your income from this source is taxed at the additional rate (45%).
• K: This code means you have income that isn't being taxed another way, and the deductions due are more than your tax-free allowance. Your employer will deduct extra tax to cover this.
• S: You are a Scottish taxpayer, and your tax is calculated using Scottish rates.
• C: You are a Welsh taxpayer, and your tax is calculated using Welsh rates.
• M: You have received 10% of your partner's Personal Allowance through Marriage Allowance.
• N: You have transferred 10% of your Personal Allowance to your partner through Marriage Allowance.
• W1/M1 (or X): These are emergency tax codes, often used temporarily when HMRC doesn't have enough information about your income, such as when you start a new job. They calculate tax on a weekly or monthly basis, rather than cumulatively over the year, which can sometimes lead to more tax being deducted initially.

Your Payslip: More Than Just Your Pay

Your payslip provides a breakdown of your earnings and deductions for a specific pay period. Understanding it helps you verify that you're being paid correctly.

Gross vs. Net Pay

• Gross Pay: This is your total earnings before any deductions are taken off. It includes your basic salary, overtime, bonuses, and any other payments.
• Net Pay: This is the amount of money you actually receive in your bank account after all deductions have been made.

Key deductions

Deductions fall into two main categories: statutory (required by law) and voluntary (agreed upon by you).

1. Income Tax (PAYE): This is the tax deducted based on your tax code and income. For 2026/27, the basic rate is 20%, the higher rate is 40%, and the additional rate is 45% (for England, Wales, and Northern Ireland).
2. National Insurance Contributions (NICs): These contributions help fund state benefits like the State Pension and healthcare. The amount you pay depends on your earnings and National Insurance category.
3. Pension Contributions: If you're enrolled in a workplace pension scheme, contributions will be deducted from your pay. These can be either before or after tax, depending on the scheme.
4. Student Loan Repayments: If you have an outstanding student loan, repayments are automatically deducted once your income exceeds a certain threshold.
5. Other Deductions: These can include trade union fees, charitable donations (if set up via payroll giving), season ticket loan repayments, or deductions for company benefits like private healthcare.

Why Your Tax Code Might Change

HMRC reviews and updates tax codes annually, usually sending you a 'Tax Code Notice' (P2) before the new tax year starts (6 April). However, your tax code can change at other times if your circumstances alter. Common reasons include:

• Starting a new job or pension: HMRC may not have up-to-date information immediately.
• Changing jobs: Your P45 from your old employer helps your new employer apply the correct code.
• Receiving taxable benefits from your employer: Such as a company car or private medical insurance.
• Having more than one job or pension: Your Personal Allowance is usually applied to your main income, with other incomes taxed at the basic or higher rate.
• Receiving State Benefits: Some benefits are taxable and can affect your code.
• Underpaying or overpaying tax in a previous year: HMRC will adjust your code to collect or refund the difference.
• Changes to your Personal Allowance: For example, if your income goes above £100,000, your Personal Allowance starts to reduce.

What to Do If Your Tax Code or Payslip is Wrong

It's your responsibility to check your tax code and ensure it's correct. An incorrect code could mean you pay too much tax (and are due a refund) or too little tax (and face a surprise tax bill later).

1. Check your tax code: You can find your tax code on your payslip, P60 (end-of-year statement), P45 (when you leave a job), or on a 'Tax Code Notice' (P2) from HMRC. The easiest way to check is online via your HMRC Personal Tax Account or the HMRC app.
2. Contact HMRC: If you believe your tax code is wrong, contact HMRC as soon as possible. You can do this online through your Personal Tax Account, by phone (0300 200 3300), or by post. They can update your employment details or report a change in income.
3. Keep records: Always keep copies of your payslips, P45s, and P60s, as these are vital for checking your tax position.

Common mistakes

• Ignoring your tax code: Assuming your tax code is always correct without checking can lead to over or underpayment of tax.
• Not understanding emergency tax codes: Seeing W1/M1 and not realising it's a temporary code that might lead to higher initial deductions.
• Thinking bonuses are taxed differently: Cash bonuses are treated as regular employment income and are subject to PAYE and National Insurance, just like your salary. They can, however, push you into a higher tax band for that specific pay period, making the deduction seem larger.
• Not checking payslip deductions: Failing to review all deductions can mean missing errors in pension contributions, student loan repayments, or other items.