Tax code (PAYE)

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In the UK, every person paid under the PAYE scheme is allocated a tax code by HM Revenue & Customs. This is in the form of a number followed by a letter or letters, or a letter followed by numbers. This code describes to employers how much tax to deduct from an employee. The code is normally based on information provided to HMRC by the taxpayer or their employer. Tax codes are usually adjusted once a year to take into account any changes made in the National Budget, but can be altered more often if someone has paid to much or too little tax the previous tax year.
Tax codes are passed between periods of employment by a P45 which is generated when a person leaves a job. If a P45 is mislaid or not supplied at the end of a period of employment, a P46 can be filled out in order to determine which tax code is applicable to a person. Between submitting a P46 and receiving the correct tax code from the Inland Revenue, an employer can apply the emergency tax code on a week 1 basis. In this case, tax will be calculated as if the employee is working in the first week of the tax year, and all previous earnings are ignored.
At the end of each tax year employers are required to send out a P60 which documents the total earnings and tax a person has paid within that tax year.

[edit] Tax free Personal allowances

Tax codes followed by the letter L represent the size of tax free personal allowance on earnings. This is the total amount of money, per year, one can earn tax free. The number attached to them represents tax free earnings divided by 10. In the tax year 2008/2009 the standard tax free allowance on savings is £5435 which means the standard emergency tax code is 543L. Persons over 65 and 75 have an increased personal allowance.
Tax free Personal allowances can only be taken once across earnings. A second job or a job with a pension is taxed at a basic rate of 20%, or the tax allowance can be split across both sources of income.
Other tax codes can represent a basic rate of tax which doesn’t include a tax allowance (BR), an exemption from paying tax (NT) or an amount of taxable allowance to be added from other sources of income (K).