What is a PAYE coding notice and what do the numbers and letters mean?

Full answer

A PAYE coding notice, issued by HMRC as form P2, sets the tax code your employer or pension provider uses to work out how much Income Tax to deduct from each payment under Pay As You Earn. The number in the code represents your tax-free amount for the year divided by 10. The standard code for 2026/27 is 1257L, because the Personal Allowance is GBP 12,570 (frozen until April 2028) and the L denotes entitlement to the standard allowance. So a 1257L code spreads GBP 12,570 of tax-free pay evenly across the year - roughly GBP 1,048 per month - and taxes the rest at 20%, then 40% above the higher-rate threshold. The letters carry meaning: L is the basic allowance; M and N relate to the Marriage Allowance transfer (receiving or giving up 10% of the allowance); K codes mean deductions exceed your allowance, so untaxed income or benefits are added to your taxable pay; BR taxes all of that income at basic rate 20%; D0 at 40%; D1 at 45%; and NT means no tax. Scottish codes are prefixed with S, Welsh with C. HMRC adjusts your code for things like company-car or medical benefits in kind, untaxed savings interest above your Personal Savings Allowance, underpaid tax from a previous year being collected, or the loss of the Personal Allowance once income exceeds GBP 100,000 (it tapers GBP 1 for every GBP 2, creating a 60% effective rate up to GBP 125,140). Always check the notice: if your code is wrong - for example, an emergency code after starting a job, or a benefit that has ended still being deducted - you pay too much or too little tax. You can correct it through your Personal Tax Account or by phoning HMRC. Use the take-home pay or income tax calculator to confirm the deductions a given code should produce.

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