Your tax code is used by your employer or by your pension provider to calculate the amount of tax to deduct from your pay or from your pension.

Your tax code will generally change every tax year.  This is because the amount of tax-free income you can earn generally changes each tax year.  There are other reasons why your tax code may change and our guide looks at what your tax code should be in 2011.

How your tax code is worked out

Your tax code is worked out in a series of four steps.

Step 1 – Your tax allowances are added up.  Your tax allowances are the amounts you can earn without paying tax.  In 2011/12 your main Personal Allowance is £7,475.  You may also be able to claim other allowances such as Blind Person’s or Married Couple’s Allowance.

Step 2 – Any income that you haven’t already paid tax on (part-time earnings or interest) is added up.  These are your ‘deductions’.

Step 3 – Your deductions are subtracted from your allowances.  The amount that is left is the amount of tax-free income you can earn in a tax year.

Step 4 – Generally speaking, the amount of tax-free income you can earn is divided by ten and added to a letter that fits your circumstances.

Examples of tax codes

One of the most common tax codes in the 2011/12 tax year is 747L.

This is the tax code you will have when you’re eligible for the full Personal Allowance and you have no other allowances or deductions.

If you are under 65, eligible for the basic Personal Allowance but you had £1,500 of income that you had not paid tax on, your tax code would be 597L.  The 597 equates to the amount of tax-free income you can earn (£7,475 minus £1,500 = £5,975) divided by ten.  The letter L means you are eligible for the basic Personal Allowance.

Where you will find your tax code

You will find your tax code and how it has been worked out on your PAYE Coding Notice.

This document shows both your allowances and deductions and tells your employer or pension provider what tax-free income you can earn in the 2011/12 tax year.