Making sure your PAYE tax code is correct

Updated for the 2025/26 tax year

The PAYE system is designed to collect, over the course of a tax year, approximately the right amount of income tax from your earnings. This is done through the issue of one or more tax codes, which your employer uses to calculate how much tax to deduct from your pay.

However, many people continue to pay the wrong amount of tax for years – either too much, or more worryingly, too little – because they have an incorrect tax code. This often happens where HMRC has not been informed of a change in circumstances, such as changing jobs, losing or gaining benefits in kind (for example a company car), or starting or stopping pension contributions.

It is important to check your PAYE code regularly, as errors are far easier to correct during the tax year than afterwards. As a first step, check your payslip to see which tax code is currently being applied.

Understanding your tax code

The letter in your tax code indicates how your Personal Allowance is calculated:

• L – includes the standard Personal Allowance (£12,570 for 2025/26)
• T – your tax code includes adjustments that require manual review by HMRC (for example, where your income exceeds £100,000 and the Personal Allowance is tapered)
• K – applies where taxable benefits or other income exceed your allowances, meaning additional tax is collected through PAYE

The maximum tax that can be deducted using a K code is 50% of your gross pay.

HMRC will often try to collect tax on untaxed income through your PAYE code, but in some cases it may be preferable to deal with this through Self Assessment. We can arrange for PAYE adjustments to be removed where appropriate.

Employer loans

Where loans from an employer exceed £10,000 at any point during the tax year, a taxable benefit arises. This is calculated as the difference between any interest you actually pay and interest calculated at HMRC’s official rate.

The official rate of interest is reviewed periodically and should be checked for the relevant tax year.

Expense payments

Employers must report most expenses and benefits to HMRC via form P11D unless they are covered by an approved exemption.

Where expenses are not exempt, you must usually claim tax relief through your tax return. Many employers now operate payroll reporting or HMRC-approved expense exemption arrangements, which remove the need for P11Ds and individual claims.

You may also be entitled to tax relief for certain job-related expenses you incur personally, although the rules are restrictive.

Remuneration packages

An attractive remuneration package may include:

• Salary
• Bonus or performance-related pay
• Reimbursement of business expenses
• Pension contributions
• Life assurance and healthcare
• Mobile phone
• Childcare arrangements
• Salary sacrifice schemes
• Share incentive arrangements
• Company car or car allowance
• Homeworking contributions
• Other benefits, including annual functions costing up to £150 per head

Although most benefits are taxable, some attract specific reliefs. Properly structured salary sacrifice arrangements can deliver savings for both employer and employee.

Those with income over £100,000 should take particular care, as the Personal Allowance is withdrawn at a rate of £1 for every £2 of income above this level.

Travel and subsistence

Employees working away from their normal place of work may be able to claim tax relief for travel and subsistence costs, subject to HMRC’s rules on temporary workplaces and time limits.

Approved business mileage rates

Vehicle	First 10,000 miles	Thereafter
Car / van	45p	25p
Motorcycle	24p	24p
Bicycle	20p	20p

Pension contributions

Employer pension contributions are generally free of income tax and National Insurance.

The annual allowance is currently £60,000, subject to tapering for high earners. Contributions above this level may trigger an annual allowance charge.

Company cars

Company car benefits are calculated by applying a percentage to the car’s list price. The percentage depends on the vehicle’s CO₂ emissions and fuel type.

Electric and ultra-low emission vehicles continue to benefit from lower rates, although these increase gradually each year. Diesel and petrol vehicles are subject to higher percentages.

Employers pay Class 1A National Insurance at 15% on the taxable benefit.

Fuel for private mileage

If your employer provides fuel for private use, a separate taxable benefit arises. This is calculated using the fuel benefit multiplier, which is £27,800 for 2025/26, multiplied by the same percentage used for the car benefit.

The fuel charge can be avoided by reimbursing all private fuel costs.

Company vans

The taxable benefit for unrestricted private use of a company van is £3,960, with an additional £757 where fuel is also provided.

Restricting private use to home-to-work travel only can eliminate the tax charge entirely.

Next steps

• Review your PAYE tax code
• Check the tax efficiency of your remuneration package
• Assess company car and benefit costs
• Minimise National Insurance liabilities

For advice on any of the issues covered above, please contact us on 0191 256 9500 or speak to your usual RMT adviser.