Introduction to PAYE for employers
In this section:
Understanding employee tax codes
An employee's tax code is usually made up of one or more numbers followed by a letter. If you add ‘9’ to the code number this tells you the amount of pay an employee can earn from you in a tax year before they pay any tax. The tax code spreads this tax-free amount equally over the year so that your employee gets about the same take-home pay each week or month. If the tax code starts with a letter or only consists of letters then the codes works differently – as described in the table below.
Never alter an employee's tax code unless your Tax Office tells you to.
On this page:
Types of tax code
The three types of tax code
| Type of tax code | What the tax code means |
|---|---|
Suffix codes One or more numbers followed by L, P, T V or Y Example: 345L, 456V or 0T |
The number plus ‘9’ is the amount of pay an employee can earn from you in a tax year before they pay any tax. For example a tax code 508L means the employee is entitled to £5,089 of tax-free pay in the tax year. The letter determines how we’ll ask you to adjust the number part of the code to take account of any Budget changes that may affect the employee’s tax-free pay. |
Prefix codes Start with D or K Example D0 or K123 |
The code D0 means you must deduct tax at the higher rate from all pay. The letter K means your employee has already used their tax-free allowances for the year. The number plus ‘9’ indicates how much must be added to their taxable income to make sure they pay tax on all the taxable income they have received. This may mean you end up deducting tax from their pay at higher rates than normal. For example, K123 means £1,239 needs to be added to their taxable income to ensure they pay the right tax. |
Letter only codes BR or NT |
BR means you must deduct tax at the basic rate from all their pay. NT means you mustn't deduct any tax from their pay. (Note: Do not refund any tax deducted from an employee before the issue of an NT code, unless your HM Revenue & Customs office tells you to.) |
Week 1/month 1 tax codes
Most tax codes have the effect of deducting tax evenly over the full tax year – that way your employees' take-home pay doesn’t change much from week to week or month to month.
However sometimes you'll have to use a special method of working out their tax deductions - called a 'Week 1' or 'Month 1' basis depending on how often you pay them. With this method, you ignore all previous pay and tax in the year. We'll sort out the final position with your employee at the end of the tax year.
You must use the Week 1 or Month 1 basis if:
- we tell you to
- we issue a code starting with D
- we issue a code that says Week 1 or Month 1 - for example 522L M1 or 522L W1
- your new employee gives you a P45 with a Week 1 or Month 1 code on it
- it's the 53rd pay week in a tax year (to find our more follow the link below to our guide on week 53 payments)
You may also have to use the Week 1 or Month 1 basis when your new employee gives you a P45 for an earlier year – read the guidance ‘New employee – using the right tax code’ to find out more.
If you’re using payroll software or the P11 calculator the figures will be worked out automatically when you put in the Week 1 or Month 1 code. If you work out deductions manually you’ll need to use the Taxable Pay Tables Calculator Method and the Pay Adjustment Tables A. Read our guide below ‘Calculating PAYE deductions (paper methods)’ to find out more.
New employee – using the right tax code
Read our guide on dealing with week 53 payments
Calculating PAYE deductions (paper methods)
Go to booklet CWG2 'Employer Further Guide to PAYE and NICs' (PDF 462K)
Emergency tax code
We ask you to operate an emergency tax code when your employee’s tax code is unknown. Our guide ‘Taking on a new employee’ tells you when you’ll need to operate one.
The code, which is a number followed by the suffix L, is set each tax year and is the current tax year’s Personal Allowance without the final figure. The current year’s emergency tax code is published in our help book E12 Rates and Limits.
The emergency tax code can be used on a cumulative or non-cumulative basis (week 1 or month 1). The employer helpbook E12, ‘Rates and limits’ and our guides ‘Taking on a new employee’ and ‘New employee – using the right tax code’ will tell you when to use the week 1 or month 1 basis.
Using the right employee tax code
