Figures relate to tax year 2025-26 (UK) · 2025 (US)
A coding notice is the least examined document in British tax and one of the most consequential. It decides what leaves your pay every month.
Most people glance at it and file it. Americans ought to read it properly, for two reasons.
The first is that theirs is wrong more often. The second is that a wrong one distorts the credit on the American return as well.
Key takeaways
- The code tells your employer how much to take each month.
- HMRC builds it from estimates, not from facts.
- An expat's first code is very often wrong.
- An emergency code taxes you as though you had one job and no history.
- A K code means deductions exceed your allowances.
- Too much tax taken inflates your US foreign tax credit.
- Too little leaves a British bill and a credit shortfall.
- You can correct it yourself without waiting for a year end.
What is a coding notice?
HMRC's instruction to your employer about how much tax to deduct. According to GOV.UK guidance on tax codes, the code bundles your allowances and your known deductions into one number that payroll applies to every payment. You get a copy and so do they.
Our guide to your P60 and the US return covers the year end record.
The code is a forecast, not a calculation.
How does HMRC build a coding notice?
From last year's information and whatever else it holds about you. Allowances go in. Then benefits, untaxed income and any underpayment it is clawing back come off again. HMRC then divides the result by ten and adds a letter, and that is the code your employer sees.
Our guide to benefits in kind and US tax covers the items that come off.
A new arrival has no last year, which is the root problem.
Why is an expat coding notice usually wrong?
Because HMRC is estimating from nothing. Somebody arriving mid-year has no British history and often has income the system cannot see. They may also qualify for a part-year position nobody told the computer about. Estimates built on absence are rarely right.
Our guide to the statutory residence test covers your status.
In our practice the first year code is wrong more often than right.
What is an emergency code?
A default applied when payroll has nothing to go on, giving you the basic allowance and ignoring everything else. It is better than nothing and usually wrong, because it assumes a full year of even earnings in a single job. Arrivals almost always start here.
Our guide to split year treatment covers a part year.
Hand in your starter information on day one.
Reading the letters
| Element | Means | Typical case |
|---|---|---|
| L | Standard personal allowance | Most employees |
| BR | All income taxed at basic rate | A second job |
| D0 | All income at higher rate | Another employment |
| K | Deductions exceed allowances | Large benefits |
| W1 or M1 | Emergency, non-cumulative | A new arrival |
| NT | No tax deducted | A treaty or split year case |
What does a K code mean?
That your deductions are larger than your allowances, so the code adds income rather than subtracting it. Large benefits, a company car or an old underpayment can all produce one. It looks alarming, and it is often perfectly correct.
Our guide to a director's loan account covers one common cause.
There is a limit on how much a K code can take.
What is a cumulative code?
One that looks at your pay for the whole year to date and corrects as it goes. A non-cumulative code treats each month in isolation, which is why emergency codes often overtax. Moving from one to the other usually produces a refund in your pay.
The marker appears as W1 or M1 beside the number.
Getting onto a cumulative code is usually the fix.
A worked example
Take an illustrative case. An American arrives in September on an emergency code and pays tax as though she had earned evenly all year.
She overpays by several thousand pounds across the autumn.
Her American return then claims a credit for British tax she did not actually owe.
When HMRC refunds it the following spring, she has to adjust the credit and revisit the American return.
How does a wrong coding notice hurt your US return?
By misstating the foreign tax you actually paid. The credit rests on tax properly due rather than tax a payroll happened to take, so an overpayment you later reclaim never counted. Claiming it and then receiving the refund leaves your return wrong.
Our guide to Form 1116 income baskets covers the credit.
The refund year is where the problem usually surfaces.
Does underpaying cause the opposite?
It does, and it is the more common shape. Too little tax through the year leaves a balancing payment in January, which belongs to the earlier tax year for credit purposes. Americans routinely claim the credit a year late as a result.
Our guide to payments on account covers the January bill.
Match the credit to the year the tax relates to.
Can you change a coding notice yourself?
Yes, and most people do not realise it. HMRC's online account lets you correct estimated income, remove benefits you no longer receive and add expenses, and the code updates within weeks. Waiting for a year end refund is the slow route.
Our guide to registering for Self Assessment covers the account.
Correct it in the same tax year wherever possible.
Does a second job need its own coding notice?
The second employment usually gets a basic rate code with no allowance, which is right if your first job uses all of it. Where your main job does not, you can ask for the allowance to be split between them instead. Many people overpay quietly here.
Our guide to UK contractors with US clients covers additional income.
Tell HMRC which job is the main one.
Does a US salary affect your coding notice?
It can, where you remain on an American payroll while working here. Where both countries operate payroll on the same earnings, the coding has to reflect that or you pay twice through the year and reclaim later. Employers vary enormously in how well they handle it.
Our guide to shadow payroll arrangements covers dual payrolls.
Ask your employer who is operating which payroll.
What is an NT code?
An instruction to deduct no tax at all, used where a treaty position or a non-resident status means Britain should not be taxing the pay. You apply for it rather than receiving it automatically, and HMRC wants supporting evidence first.
Our guide to Form 8833 treaty positions covers the evidence HMRC wants.
Never assume one, because payroll will keep deducting.
Does a company car change it?
Substantially, because the taxable value comes off your allowances and can push you into a K code. The figure depends on list price and emissions rather than what the car costs your employer. Americans rarely expect a figure that large.
Our guide to a US secondment and tax covers employer provision on a posting.
Report the change the month the car arrives.
What if you leave mid-year?
Your code stops with the job and any overpayment usually comes back through Self Assessment or a repayment claim. Leaving Britain entirely adds a separate form telling HMRC you have gone, and that form is what triggers the refund.
Our guide to moving back to the US covers departure.
Do not leave a refund sitting unclaimed for years.
Does it cover your pension contributions?
Only where the code carries the relief rather than the scheme taking it at source. Workplace schemes mostly take contributions before tax, which needs no adjustment, while personal pension relief for higher rate taxpayers often appears in the code instead.
Our guide to employer pension contributions covers the schemes.
Check that you actually get your higher rate relief.
Does a coding notice matter if you file a return?
Less, because the return reconciles everything at the year end anyway. It still matters for cash flow across twelve months, and for the timing of the American credit. Getting it right during the year is simply cheaper than fixing it afterwards.
Our guide to an HMRC enquiry covers the British process.
A big January bill is usually a coding failure.
How often does a coding notice change?
Whenever HMRC learns something new, which can mean several notices in a year. Each one supersedes the last, so the date on the letter matters more than its arrival order in the post. Keep them all until the year closes.
Our guide to making tax digital covers the reporting changes.
Check the date before acting on any of them.
What records should you keep?
Every notice, your payslips, your year end certificate and any refund letters. Those four reconstruct what you actually paid in each British tax year, which is what the American credit needs. The brown envelopes matter more than they look.
Our guide to exchange rates on a US return covers converting the figures.
File them by tax year rather than by month.
What does the number itself mean?
Roughly a tenth of the tax free pay the code gives you for the year. A standard code of 1257L carried £12,570 of allowance for 2025-26, so payroll gave you a twelfth of that each month. Anything smaller means deductions have eaten into it.
Our guide to the UK marriage allowance covers one adjustment.
A larger number is rare and usually means allowable expenses.
Does Scotland use different codes?
The structure is the same and the rates are not. A Scottish taxpayer gets an S before the number, and the bands behind it differ from the rest of Britain. That matters to the American credit, because the amount of British tax changes.
Our guide to Scottish income tax and the US credit covers the rates.
Your address decides it, not your employer's.
What if two employers use the same code?
You get the allowance twice and underpay all year, which ends in a bill. It happens when a new employer applies a starter code while the old one is still running. Catching it early costs nothing; catching it in January costs the balance.
Tell HMRC as soon as the second payslip arrives.
Overlapping employments are the classic cause.
Can expenses go into the code?
Yes, where you have allowable job expenses that recur. Professional subscriptions and some travel costs can be built in, which gives relief monthly instead of at the year end. HMRC asks for evidence the first time and then carries it forward.
Our guide to IR35 rules for US citizens covers contractor expenses.
Remove them when the expense stops.
Does a bonus distort it?
Temporarily, because a cumulative code treats a one-off month as though it repeated. The system corrects itself over the following months, so the money comes back in your pay rather than needing a claim. Patience is usually the right response.
Our guide to UK bonus payments and US tax covers the American side.
A March bonus is the exception, since no months remain.
What about a student loan deduction?
It rides alongside the code rather than inside it, taken as a separate line on your payslip. American graduates with British loans and British graduates alike see it. It is not a tax, so it never features in the foreign tax credit.
Our guide to US student loans abroad covers the American ones.
Never include it in the British tax you claim credit for.
Who do you contact about it?
HMRC rather than your employer, because payroll only applies what it is told. Your employer cannot change a code and should not be asked to. The online account is faster than the telephone, especially from a British evening.
Our guide to the IRS online account from the UK covers the American equivalent.
Payroll will apply a new code the month after it lands.
Does a pay rise need reporting?
Not by you, because the employer reports pay each month anyway. HMRC adjusts the code when the figures drift far enough from its estimate. A large rise part way through a year is the case most likely to need a nudge.
Check the code after any big change in pay.
The system reacts, but it reacts slowly.
Does a coding notice reach you abroad?
Only if HMRC holds a current address, and plenty do not. People who moved within Britain or arrived recently often never see the letter at all, while payroll applies it regardless. So the online account is the reliable way to read your own code.
Update your address with HMRC separately from your employer.
Telling payroll is not telling HMRC.
How to check a coding notice
- Find the date and confirm it is the most recent notice.
- Check the estimated income against what you will actually earn.
- Look for benefits you no longer receive.
- See whether an old underpayment is still being collected.
- Confirm whether the code is cumulative or emergency.
- Ask for the allowance to be split if you have two jobs.
- Correct anything wrong through your online account.
- Keep the notice with that year's payslips for the US credit.
Mistakes and penalties we see with a coding notice
The first is leaving an emergency code running for a whole year and lending HMRC several thousand pounds for free.
The second is claiming an American credit for British tax that came back a few months later.
The third is ignoring a K code as an error when it was correct, then facing a bigger bill at the year end.
The fourth is leaving Britain without telling HMRC, so a refund sits unclaimed indefinitely.
How US UK Tax Accountants helps
We read the code at the start of the year rather than the end, because almost every January surprise we see was visible in a notice twelve months earlier.
Then we match British tax to the right American year. Our UK Self Assessment service covers the return.
If your pay looks wrong or your January bill did, get in touch.
Last reviewed 28 October 2026. This article is general information and not personal tax advice, and codes depend on your own circumstances.
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Official guidance from the IRS, FinCEN and GOV.UK. Thresholds and rates on those pages are updated annually — check the current tax year before relying on a figure.
