Understand Your Payslip, Tax Code and PAYE / Lesson 5 of 8
When your code changes mid-year
A letter arrives, your code drops 300 points, and no explanation is obvious.
The short answer
- ✓ The P2 coding notice shows exactly how your code was built
- ✓ Deductions on it are HMRC estimates, and estimates persist until corrected
- ✓ Small underpayments are often collected by reducing next year's allowance
- ✓ Checking the figures in your Personal Tax Account takes minutes
Coding notices
When HMRC changes your code it sends a PAYE coding notice, form P2. It shows how the code was built: your allowance, then each deduction that reduces it, and the resulting figure.
Personal allowance £12,570
Less company car benefit -£4,200
Less untaxed savings interest -£300
Less underpayment from an earlier year -£820
---------
Allowance for the year £7,250
Your code 725LEvery line on that notice is an estimate HMRC has made. If an estimate is wrong, the code is wrong, and it stays wrong until you say something.
The usual causes of a mid-year change
| Cause | What it does to the code |
|---|---|
| You started getting a company car or medical cover | Reduces it, often sharply |
| HMRC thinks you underpaid in an earlier year | Reduces it, to collect the shortfall |
| Estimated untaxed income such as savings interest | Reduces it |
| You claimed job expenses | Increases it |
| You started or stopped Marriage Allowance | Changes the letter and the number |
| A second job ended | Reallocates your allowance |
Collecting an underpayment through the code
Where you owe a relatively small amount from an earlier year, HMRC often collects it by reducing your allowance across the following year rather than sending a bill. Convenient, but it makes your take-home fall for reasons that have nothing to do with your current pay.
The bit HMRC does not spell out
Estimates carry forward. If HMRC estimated £600 of savings interest for you three years ago, that estimate may still be sitting in your code today, quietly reducing your allowance, even though the account was closed. Nothing removes it automatically because nothing tells HMRC the circumstances changed.
The fix is a five-minute job in your Personal Tax Account: check the figures behind your code and correct any that are out of date. It is the highest value five minutes in this whole course.
Common mistakes
- Filing the P2 unread. It is the only explanation you get.
- Accepting stale estimates. They persist for years unless corrected.
- Assuming a benefit ending updates the code. Tell HMRC.
Try it on your own numbers
This is the same calculator as the full tool page, using 2026/27 rates.
Employee & employer
Benefits - cash equivalent (£)
Enter the taxable value of each benefit provided. Leave blank if not applicable.
For your records. P11Ds must be filed online with HMRC after the tax year end.
P11D
Expenses and benefits
Add benefit values on the left to build the P11D.
Class 1A NIC (employer, 15%):
Key takeaways
- ✓ The P2 coding notice shows exactly how your code was built
- ✓ Deductions on it are HMRC estimates, and estimates persist until corrected
- ✓ Small underpayments are often collected by reducing next year's allowance
- ✓ Checking the figures in your Personal Tax Account takes minutes
Check you have got it
3 quick questions. No score is kept, and you can change your mind.
1. What is a P2?
2. HMRC estimated savings interest for you years ago and the account is now closed. What happens?
3. Why might HMRC reduce your allowance to collect an underpayment?
Sources
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