HMRC Coding Notice: What to Do When Your Tax Code Changes

What a P2 coding notice is

When HMRC changes your PAYE tax code for any reason, it sends a P2 Coding Notice in the post (or to your Personal Tax Account if you've gone paperless). The notice has three sections:

1. Allowances — items reducing your taxable pay. The headline £12,570 personal allowance, marriage allowance, blind person's allowance, professional subscriptions, work expenses.
2. Deductions — items adding to taxable pay. Benefits-in-kind (company car, medical insurance), untaxed interest, underpaid tax from a prior year, state pension.
3. Your tax code — allowances minus deductions, divided by 10, with a letter suffix.

Example: PA £12,570 − company car £4,300 = £8,270 → code 827L.

The 7 most common reasons HMRC changes your code

1. New benefit-in-kind reported on P11D

Your employer files a P11D by 6 July each year, listing benefits you received in the previous tax year. HMRC bakes the value into next year's code. New car? Code drops. Medical cover ended? Code rises.

2. Prior-year underpayment being collected

A reconciliation (P800) found you owe £400 from last year. HMRC adds it to this year's code as a deduction worth £400 × your marginal rate. On £40k that's an extra £33/month tax.

3. Untaxed interest

Banks now report interest paid to HMRC. If you've used your Personal Savings Allowance (£1,000 basic / £500 higher / £0 additional), HMRC adds expected excess interest to the code.

4. State pension started

The State Pension is taxable but not taxed at source. HMRC deducts your expected annual State Pension from your code, ensuring tax is taken via PAYE on your private pension or job. See state pension forecast.

5. Marriage Allowance transfer

Either receiving (£252/year credit, code becomes 1383M) or transferring (lose £1,260, code 1131N). See Marriage Allowance claim guide.

6. Second income notified

A new job, side gig, or rental property reported. HMRC may put the secondary income source on BR (basic rate flat 20%) or D0 (40%) or D1 (45%) and your main job stays on 1257L.

7. High income surcharges

HICBC collection of Child Benefit charge via code (less common now CB is opt-in directly to HMRC), or £100k taper starting to bite.

Decoding your code letter

See the full UK tax codes explained guide for letter-by-letter detail.

Worked example — Sophie's code drops from 1257L to 827L

Sophie gets a new company car (BMW iX1, P11D value £45,000, BIK 3% = £1,350). She also has private medical cover (£1,200/year). HMRC adds these to her deductions:

If Sophie also has £1,000 of accumulated underpayment from a prior year (worth £1,750 at 40% × 2.5 grossed up — HMRC adds £1,750 of pseudo-income deduction), her code drops further to about 827L.

Monthly impact on £55k salary: tax-free pay drops by £212.50/month → +£85/month income tax at 40%.

Worked example — Raj receives a K245 code

Raj earns £80,000 and has a £30,000 BIK (chauffeur-driven car). His "allowances" (£12,570) are less than his "deductions" (£30,000) — by £17,430. HMRC issues a K-code:

• K245 means £2,450 is added to his taxable salary, not subtracted.
• PAYE treats his pay as £82,450 for tax-calculation purposes.
• Extra tax: ~£980/year compared to 1257L.

K-codes are legally capped at 50% of pay being taken in any one period — but if the underlying liability is real, it'll all come out somewhere. A K-code is always worth a sanity check.

How to challenge a code

Online (fastest):

1. Sign in to Personal Tax Account at gov.uk/personal-tax-account.
2. Click Pay As You Earn (PAYE).
3. Open Check your Income Tax → Tell HMRC about a change.
4. Remove obsolete benefits, update estimated untaxed income, correct prior-year items.

Phone: 0300 200 3300 (Mon-Fri 8am-6pm). Have your NI number and a recent payslip ready.

Post: PAYE, HM Revenue and Customs, BX9 1AS.

Self Assessment taxpayers: the year-end SA return reconciles everything regardless — but waiting risks 12+ months of wrong PAYE.

Common false codings to spot

• Phantom company car still on the code after you returned it.
• Untaxed interest estimate based on an old high-rate savings year that's no longer accurate.
• Marriage Allowance still applied after divorce / death of spouse.
• State Pension figure wrong by £200-£500 if your start date was mid-year.
• Multiple "underpayments restored to code" appearing year after year because the original P800 was disputed.

What happens after you correct the code

HMRC issues an updated P6/P9 to your employer typically within 5 working days. Your next pay run applies the new code. If cumulative, the corrected code recalculates year-to-date — you may see a one-off refund (or extra deduction) in that period. Subsequent months smooth out.

If the change is mid-year and the refund would be large, HMRC sometimes issues the new code as W1/M1 to avoid a payroll shock. Cumulative status restores from 6 April.

Try the calculator

Sources

• HMRC: Tax codes
• HMRC: P2: notice of coding
• HMRC: Check your Income Tax
• HMRC: P11D Guide