Notices of coding
Notices of coding are the means by which HMRC notifies both the employee and the employer of the tax code to be applied to the employee’s earnings. There are several types of coding notice, as detailed below. Only one of these types of notice, form P2, is sent to the employee, the others are sent to the employer only. The type of notice sent is determined by the circumstances giving rise to the change in the employee’s tax code.
With the introduction of the Personal Tax Account (PTA), and HMRC’s encouragement of its take up, form P2 is more likely to be sent electronically.
This is the notification that the employee receives from HMRC detailing what the tax code is and how it has been derived.
The coding starts with the appropriate personal allowance. Added to this are any reliefs that the employee can claim, eg subscriptions to recognised professional bodies. This total is then reduced by the value of any untaxed income or benefits provided by the employer, such as private medical insurance.
The tax code is found by replacing the last digit of the amount by a designated letter. This is usually ‘L’ or ‘T’. ‘T’ is not related to any specific allowance but indicates that the code needs to be reviewed by HMRC. See the GOV.UK website. See below for tax codes prefixed ‘K’.
From 6 April 2015, two new suffixes, ‘M’ and ‘N’, were introduced. These are used where one person in a married couple or civil partnership has transferred part of the personal allowance to the other. Under rules for transferable tax allowances for married couples and civil partners, 10% of the personal allowance can be transferred providing the receiving spouse / partner is a basic rate taxpayer. The recipient of the transferred allowance will have a tax code suffixed ‘M’, while the transferor will have an ‘N’ suffix. For more details of the transferable tax allowance, see the Transferable tax