HMRC Tax Coding Notice (P2) Explained: How to Read Your 2026/27 Tax Code

What is a P2 Notice of Coding?

If your tax code changes, HMRC sends you a P2 Notice of Coding — formally called a "Notice of Tax Code". It sets out:

1. What allowances HMRC is giving you (things that reduce your taxable income).
2. What deductions HMRC has applied (things that increase your taxable income — e.g. company car benefit, unpaid tax).
3. The resulting tax code number and letter that your employer or pension provider will use.

Your employer does not decide your tax code — HMRC sends it directly to them via their PAYE system (and sends you the P2 at the same time). Most people receive a P2 notice by post in January or February before the start of the new tax year, or when their circumstances change.

You can also view your current tax code at any time via your Personal Tax Account at gov.uk/personal-tax-account.

How to read the P2 notice

A typical P2 notice has two main sections:

Section 1 — Allowances (things that reduce your tax):

• Personal Allowance: £12,570 (for most people in 2026/27)
• Marriage Allowance (if applicable): +£1,260
• Blind Person's Allowance (if registered)
• Job expenses (if claimed)
• Other allowances

Section 2 — Deductions (things that increase your taxable income):

• Company car Benefit in Kind (P11D value × BIK percentage)
• Private medical insurance (employer-provided)
• Unpaid tax from previous years (coded out)
• State Pension or other pension income HMRC is collecting tax on
• Other untaxed income

The code is derived from: Total Allowances − Total Deductions.

The number in the code is (net allowance ÷ 10), rounded down. So £12,570 → code number 1257. The letter indicates the type of allowance or special condition.

Example — employee with company car:

This employee's tax-free pay is effectively only £6,570, because £6,000 of it is "used up" by the car benefit.

Common tax codes explained

1257L — the standard code

The most common code in 2026/27. Means:

• Tax-free income: £12,570 (the standard Personal Allowance).
• Applied cumulatively — at any point in the year, 1/12th (monthly) or 1/52nd (weekly) of the annual free pay has been accumulated.

BR — Basic Rate, no allowance

All income taxed at 20%, with no Personal Allowance. Used when:

• You have a second job and the PA is already allocated to your first job.
• You have a second pension in payment.
• Your employer has no P45 or Form P46 for you.

At a second job earning £800/month, BR means £160/month deducted — whereas if you earned only that amount, you might owe nothing (under £12,570 threshold).

D0 — Higher rate, no allowance

All income taxed at 40%, no Personal Allowance. Typically:

• A second job for a higher-rate taxpayer.
• A pension where the pensioner is a 40% taxpayer and the allowance is used elsewhere.

D1 — Additional rate, no allowance

All income taxed at 45%. Used for additional-rate taxpayers' secondary income sources.

K codes — negative Personal Allowance

K codes arise when your total deductions exceed your allowances — usually because Benefits in Kind (company car, private medical insurance) are worth more than your Personal Allowance.

The code works in reverse: instead of reducing your taxable income, it increases it.

Example: K100 means an extra £1,000 is added to your taxable pay. If you earn £40,000, PAYE treats your income as £41,000 for tax purposes.

HMRC places a 50% limit on how much a K code can reduce your take-home pay in any single pay period — a safeguard against excessive deductions.

Common cause: Company car with high CO2 emissions or high list price. A petrol car at 30% BIK on a £50,000 list price = £15,000 BIK. After subtracting the £12,570 PA, the remaining £2,430 is coded out as K243.

0T — No Personal Allowance

All income taxed at the relevant rate from the first pound, with no tax-free amount. Used when:

• You have not provided a P45 from a previous employer (emergency tax).
• You have income above £125,140 (where the PA is fully withdrawn).
• Your allowances have all been used against other income.
• You have recently started a new job with no previous P45.

0T is often applied on a non-cumulative (W1/M1) basis in emergency situations.

W1 / M1 — Emergency non-cumulative codes

When W1 (Week 1) or M1 (Month 1) is appended to a code, it becomes non-cumulative:

• Each pay period is taxed independently, as if it were the first period of the year.
• No account is taken of tax paid or free pay accumulated earlier in the year.
• Can result in over-taxation, particularly if applied part-way through the tax year.

W1/M1 codes are used when HMRC does not have enough information to apply a cumulative code — typically at the start of a new job without a P45, or after a period of self-employment.

Action needed: If you have an M1 or W1 code, contact HMRC as soon as possible with the details of your previous pay and tax — they can update the code to cumulative and recover any overpaid tax automatically through your payroll.

NT — No Tax

No tax deducted at all. Used for:

• Crown servants working overseas.
• Certain offshore workers.
• Specific exemptions under double taxation treaties.
• Employees seconded from abroad under specific HMRC agreements.

NT is not a general emergency code — if you see this and are not in one of these categories, contact HMRC immediately.

Prefix letters: S, C, and the standard (no prefix)

Scottish taxpayers have a separate rate structure set by the Scottish Parliament (currently 5 bands: Starter 19%, Basic 20%, Intermediate 21%, Higher 42%, Top 47%). The S prefix signals to HMRC and the employer that Scottish rates should be applied.

Suffix letters on tax codes

What to do if your code is wrong

Wrong tax codes are more common than most people realise. Errors typically arise from:

• Stale BIK data: Your employer submitted an incorrect P11D value for a company car or benefit — overstating your benefit and underpaying you.
• State Pension estimate error: HMRC estimated your State Pension income to collect tax via your employment code, but used the wrong amount.
• Second income not removed: You left a second job but HMRC has not removed the BR/D0 restriction.
• Old address: HMRC is corresponding with a previous address — codes were changing but you never received the notice.

Steps to check and correct:

1. Log in to gov.uk/personal-tax-account — view your current code and the components.
2. If you see incorrect BIK values, check your P11D from your employer (which they should have given you by 6 July after the end of the tax year).
3. Update your details in the Personal Tax Account if possible — many items can be corrected online.
4. Call HMRC on 0300 200 3300 (Monday–Friday, 8am–6pm) if online correction is not available.
5. HMRC will issue a revised code and your employer will apply it from the next payroll run.

If you have overpaid tax due to a wrong code, HMRC issues a P800 reconciliation notice after the tax year ends (typically July–November) and arranges repayment automatically.

Common errors in company car BIK coding

Company car benefit is one of the most common sources of incorrect tax codes. Errors include:

• Wrong list price used (should be the manufacturer's published price including options, not the negotiated purchase price).
• Incorrect CO2 figure — the BIK percentage is determined by the car's official CO2 emissions.
• Fuel benefit included when the employee pays for all private fuel themselves.
• Previous year's car still coded when the car has been returned.

If you receive a P11D from your employer each July showing your car's benefit value, check it against your P2 notice. Any discrepancy should be raised with your employer's payroll team first, then with HMRC if unresolved.

Sources

• HMRC: Tax codes — what they mean
• HMRC: Understanding your tax code
• HMRC: Tell HMRC about changes that affect your tax code
• gov.uk: Personal Tax Account
• HMRC: Company car and car fuel benefit