What is a tax code?

Tax codes appear on payslips and P60s and are issued by HMRC to tell employers how much Income Tax to deduct from wages under PAYE. Many founders encounter them as employees without paying much attention — until they receive an unexpected code change, find they have been taxed incorrectly, or need to set up payroll for the first time and must understand the system properly.

A tax code is a combination of numbers and letters assigned by HMRC to indicate the tax-free income an individual is entitled to in a given tax year and any adjustments that apply. Codes are adjusted to reflect circumstances such as multiple jobs, underpaid tax from a previous year, or benefits in kind provided by an employer. Incorrect tax codes result in too little or too much tax being deducted, requiring correction through HMRC.

Employers are responsible for applying the tax code provided by HMRC for each employee — if the code appears incorrect, the employee should contact HMRC directly to have it reviewed. Common reasons for unexpected codes include changes in employment status, employer errors, or additional income sources. Our guide to PAYE and tax codes explains how codes are calculated and what to do if yours appears wrong.