PAYE cannot take more than half your pay
Almost nobody is told this when an unfamiliar tax code lands on a payslip.
Whatever the code says, the tax taken in any one pay period is capped at 50% of your gross pay for that period. The rule began as a protection on K codes and was extended to every tax code on 6 April 2015. Anything the code would have taken above the cap carries into the next period rather than disappearing, so it is a delay and not a write-off, but it does mean a wrong code cannot empty a pay packet while you sort it out.
How a code is built
A tax code is three parts read left to right, and once you can see the seams they stop being cryptic.
- An optional country prefix. S for Scotland, C for Wales, nothing for England and Northern Ireland.
- A number, which is your tax-free allowance divided by ten. 1257 means £12,570.
- Letters, which say what kind of code it is. L is the standard allowance, M and N are the two halves of Marriage Allowance, T means other calculations are involved.
Some codes have no number at all. BR, D0, D1 and NT are whole codes in themselves and they set a flat treatment for every pound from that job rather than an allowance.
The D codes do not mean the same thing either side of the border
The codes look like one shared system. They are not:
- D0 is 40% in England, Wales and Northern Ireland. SD0 is 21% in Scotland.
- D1 is 45%. SD1 is 42%, so this pair runs the other way.
- Scotland adds SD2 at 45% and SD3 at 48%, which have no equivalent elsewhere.
Read "D0 means higher rate" off an English guide while holding an SD0 code and you are out by nineteen points. BR and SBR agree, both at 20%, the only matching pair.
A K code is not a punishment
Every other code hands you tax-free income. A K code runs the opposite way: untaxed income has overtaken your allowance, so the difference is added to the pay you are taxed on. K475 adds £4,750 to your taxable pay rather than taking anything off it.
The usual causes are a company car, medical cover, the state pension being paid gross, or an underpayment from an earlier year being collected through the code. None of those is a mistake or a penalty, though it reads like both. What is worth doing is reading the coding notice, because it lists what HMRC believe that untaxed income to be, and that figure is frequently out of date. A car you gave back two years ago can still be sitting in it.
Emergency codes, and why a bonus month stings
A code ending W1, M1 or X is an emergency code. The difference is not the allowance, it is the memory: an emergency code works your tax out on that period alone, as though you were paid that amount every period of the year. A normal cumulative code looks at your total income so far and adjusts.
That is why a first payslip in a new job can be taxed far too heavily, and why a month containing a bonus can be taxed as though the bonus were your new normal salary. Giving a new employer your P45 is the fix, and HMRC usually update the code once they have details from both employers, which can take up to 35 days from starting.
If you think the code is wrong
The code is HMRC's, not your employer's. Payroll cannot change it on request and should not be asked to: they are legally required to operate whatever code they are given. Correcting it means contacting HMRC directly, and the thing to have in front of you is the coding notice, which itemises every adjustment.
Overpaid tax comes back automatically once the code is corrected within the same tax year, usually as a rebate through the payroll rather than a separate payment. Across tax years it is a reclaim instead. Either way the money is not lost, which along with the 50% cap is the reassuring half of a subject that is almost always encountered while worried.
Common questions
What does 1257L mean?
The number is your tax-free allowance divided by ten, so 1257 means £12,570 of income before any tax is due. The L means you get the standard Personal Allowance with nothing unusual attached. It is the most common code in the country and it is what most people should be on.
How much tax can be taken from one payslip?
Never more than half your gross pay for that period. The 50% overriding limit started as a protection on K codes and was extended to every tax code on 6 April 2015. If the code would take more than half, the excess carries into the next period rather than being written off. It is the most useful thing to know when a frightening code lands, because it means a pay packet cannot be emptied.
Is D0 the same as SD0?
No. D0 outside Scotland taxes everything at the higher rate of 40%. SD0 in Scotland taxes everything at the Scottish intermediate rate of 21%. Same shape, half the rate, and that is what catches people out. It runs the other way further up: D1 is 45% and SD1 is 42%. Scotland has five flat codes, SBR, SD0, SD1, SD2 and SD3, against three everywhere else.
What is a K code and am I being punished?
No. A K code means untaxed income has overtaken your allowance, so instead of sheltering income the code adds to it. K475 adds £4,750 to the pay you are taxed on. The usual causes are a company car, medical cover, the state pension, or an underpayment being collected through the code. It is worth checking the coding notice, because the figure HMRC hold is often out of date.
Why was my first payslip in a new job taxed so heavily?
Probably an emergency code, which ends in W1, M1 or X. An emergency code works your tax out on that period alone, as though you were paid that amount every week or month of the year. A normal cumulative code looks at your income so far instead. Give the new employer your P45 and HMRC usually corrects it, though it can take up to 35 days from starting.
What is the difference between 0T and BR?
Both give you no tax-free allowance, but they tax differently. BR taxes everything at one flat rate, the basic rate of 20%. 0T runs the normal bands, so higher earnings still reach 40% and above. That makes 0T the harsher of the two on a large payment, which surprises people who assume no allowance means basic rate.
What do the S and C prefixes mean?
S means Scottish rates and C means Welsh rates. Welsh rates are set separately from the rest of the UK but currently match the England and Northern Ireland rates, so in practice the C prefix changes who receives the revenue rather than what you pay. The S prefix genuinely changes the arithmetic, because Scotland has six bands where the rest of the UK has three.