Go back to insightsBreaking the Code
If you’ve recently received a new tax code, don’t just file it away, check it carefully. It may not be correct.
A recent Freedom of Information request submitted by a Top 20 accountancy firm revealed unwelcome news for taxpayers. HMRC estimated that £3.47 billion in income tax was overpaid in 2023/24, affecting around 5.6 million people. The firm highlighted errors in Pay As You Earn (PAYE) tax codes as one of the major reasons behind this overpayment.
If you are employed or receive a private pension, you will have a PAYE code, or multiple codes if you have more than one income source. These codes are calculated by HMRC and sent directly to your employer or pension provider. You might receive a paper PAYE coding notice, often issued before a new tax year, but if not, you can view your code online through your HMRC Personal Tax Account.
PAYE has been around since 1944, and the tax code remains a central tool in helping HMRC collect the correct amount of income tax, especially for those outside the self-assessment system.
Although a tax code is expressed as a simple number, it is built from several components:
- Taxfree allowances:
This includes your personal allowance (if you are eligible for one) and any additional allowances, such as taxdeductible work expenses. - Taxable deductions:
These can include benefits in kind (such as company cars), estimated untaxed interest for the current year, and the recovery of underpaid tax from earlier years.
The collection of underpaid tax often causes confusion, as it relies on HMRC estimating your marginal tax rate. For example, if you are a 40% taxpayer and owe £1,000, HMRC will increase your code’s deductions by £2,500, because £2,500 at 40% recovers the £1,000 owed.
If you believe any part of your tax code is incorrect, for example, if your new company car is electric and has a much lower taxable value, contact HMRC directly, not your employer or pension provider. Only HMRC can amend your tax code.
Tax treatment depends on individual circumstances and may change.
The Financial Conduct Authority does not regulate tax advice.
13th February 2026