P2 Notice of Coding: Act Now or Pay Later
Got a P2 Notice of Coding from HMRC? Here is exactly what to do in the next 30 days to avoid overpaying tax or racking up an unexpected bill.
Got a P2 Notice of Coding letter sitting on your kitchen table, or buried in your HMRC online account? You have roughly 30 days before it becomes your employer's problem, and potentially your financial one too.
- A P2 Notice of Coding tells you what tax code HMRC has set for you and why. It is not a bill, but it can create one if you ignore it.
- You have around 30 days from the issue date to challenge the code before your employer applies it to your pay.
- A wrong tax code can cost hundreds of pounds per year. Checking yours now at /check-my-tax-code takes two minutes.
- The most common errors are uncollected debt from previous years, benefits-in-kind your employer reported incorrectly, and HMRC guessing at your second income.
- You do not need an accountant to challenge a P2. You can do it yourself through your HMRC personal tax account or by phone.
- P2 Notice of Coding
- A letter (or digital notification) issued by HMRC, usually in January or February each year, that explains the tax code they intend to use for the coming tax year. It shows how HMRC has calculated your Personal Allowance, what deductions or additions they have applied, and what code your employer or pension provider will be instructed to use.
Why HMRC Sends You a P2 (And Why It Is Often Wrong)
HMRC issues P2 Notices of Coding every January and February for the tax year starting 6 April. Roughly 40 million PAYE tax codes are recalculated annually, many of them automatically by HMRC's systems without a human ever reviewing your specific circumstances.
That automation is the problem. HMRC's systems work from data submitted by employers, pension providers, and DWP. When that data is late, incomplete, or mismatched, the code you receive can be wrong before the ink is dry. According to HMRC's own figures, around 2.4 million people were issued refunds in 2022-23 because too much tax had been collected through PAYE, a direct consequence of incorrect coding notices going unchallenged.
The letter itself is not alarming to look at. It arrives in a plain HMRC envelope or as a notification in your online account. But what it contains can quietly cost you significant money across the tax year if you file it in a drawer and forget about it.
What the P2 Actually Contains
The P2 is structured in a way that looks deceptively simple. It shows your tax code (for example, 1257L), then lists the components that built it. Understanding those components is where most people fall at the first hurdle.
Your Personal Allowance
Most people start with the standard Personal Allowance: £12,570 for 2025-26. If your code shows a lower figure, HMRC has either reduced it to collect an underpayment from a previous year, or because they believe you earn over £100,000 (at which point the allowance tapers away at £1 for every £2 earned above the threshold).
Deductions Applied Against Your Allowance
This is where errors hide. HMRC may have reduced your allowance to collect:
- Underpaid tax from a prior year, often from a period when you had two jobs simultaneously or changed employer mid-year
- Estimated untaxed income, such as a side income HMRC has guessed at based on your previous Self Assessment return
- Benefits-in-kind, such as a company car or private medical insurance your employer has reported to HMRC via a P11D
- State pension income, which is paid without tax deducted and so is often collected through your employment code
Each of these can be legitimate, or they can be based on stale data. Your job is to verify them.
Additions to Your Allowance
Some P2 notices show allowances being increased. Common reasons include Marriage Allowance transfers (explored in detail in N Tax Code Marriage Allowance: What the Transfer Actually Does) or flat-rate job expense relief that HMRC has applied automatically.
The Five Most Common P2 Errors (And What to Do About Each)
1. An Underpayment That Was Already Settled
HMRC sometimes carries forward a debt from a previous year, adjusting your code to collect it through reduced take-home pay, even when you already paid it via a cheque or bank transfer. If you settled an HMRC bill directly and then received a P2 showing a coding restriction, check your payment records and call HMRC's income tax helpline on 0300 200 3300 to confirm the payment was allocated.
2. Benefits-in-Kind Reported at the Wrong Value
Your employer submits a P11D each July reporting any benefits they provided you with during the previous tax year. If the figure on your P2 does not match what you actually received, the error originates with your employer's submission, not HMRC. Contact your HR or payroll department first, then ask them to issue a corrected P11D if necessary.
3. Two Jobs, One Allowance Applied Twice
If you have two PAYE jobs, only one should receive the full 1257L code. The second job should normally receive a BR or D0 code, meaning tax is collected at the basic or higher rate with no Personal Allowance applied. If both employers are applying a full allowance, you are building an underpayment that will surface later, either via a revised P2 or a P800 end-of-year calculation. For more on how that works, see Annual Tax Calculation P800: What HMRC's Letter Really Means.
4. Estimated Self-Employment Income That No Longer Applies
If you did occasional freelance work two years ago and submitted a Self Assessment return, HMRC may still be estimating that income going forward and reducing your PAYE code accordingly. If you have stopped that work, you need to tell HMRC. Log in to your personal tax account and update your income details, or contact the helpline.
5. State Pension Collected Through the Wrong Employer
For those receiving the State Pension alongside PAYE income, HMRC assigns the pension income collection to one of your tax codes. If you have changed employers since retiring, the system may still be pointing at an old employer who no longer pays you anything. The result is a coding notice that collects nothing and an end-of-year shortfall.
How to Respond to a P2: Step by Step
You have three routes. All of them are free. None of them require a tax adviser.
Option 1: Online via Your HMRC Personal Tax Account
This is the fastest route for most people. Sign in at gov.uk/personal-tax-account. Navigate to "Check your Income Tax" for the current year. You can view the components of your tax code, update income estimates, and flag errors directly. HMRC will usually update your code within 10 working days and notify your employer automatically. Check your tax code now at /check-my-tax-code to see what HMRC currently holds for you before you start.
Option 2: Write to HMRC
If the error is complex or involves a disputed P11D figure, a written record is worth having. Write to PAYE and Self Assessment, HM Revenue and Customs, BX9 1AS. Quote your National Insurance number and explain precisely which line on the P2 you are disputing and why. Keep a copy.
Option 3: Phone 0300 200 3300
For simple errors, a phone call is often resolved on the same day. Call Monday to Friday, 8am to 6pm. Have your P2 letter, National Insurance number, and any relevant paperwork (payslips, P11D, payment receipts) to hand before you dial.
For a detailed walkthrough of how to build a challenge and what to say, the post How to Dispute an HMRC Tax Code and Win covers the process comprehensively.
What Happens If You Do Nothing
If you ignore the P2, your employer will apply the new code from 6 April and adjust your monthly pay accordingly. That might mean:
- Less take-home pay each month if the code is too low (collecting too much tax)
- More take-home pay each month but an underpayment building up, which HMRC will recover later through a revised code or a P800 demand
Neither outcome is comfortable. A tax code that collects too little is particularly insidious because the underpayment can grow for an entire year before HMRC notices, at which point they will either code out the debt over two years (reducing your pay) or, if it is large enough, issue a formal demand.
For context, a single digit error in your tax code on a salary of £55,000 could mean paying roughly £200 too much or too little per year. A two-digit error in the allowance figure could push that closer to £400. Neither is a catastrophe, but both are entirely avoidable.
The question of whether your code is being applied cumulatively or not also matters here. If your code switches to a Week 1 or Month 1 basis mid-year, the way tax is calculated changes entirely. That distinction is worth understanding: Tax Code With Week 1 Basis: Why You're Overpaying explains the mechanics.
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The Timing Problem: Why January Matters
HMRC issues most P2 notices between January and March. Your employer receives the new code instruction at roughly the same time. If you wait until April to open the letter, the code is already live and collecting tax at the wrong rate.
The first payslip of the new tax year, usually in late April, is your last easy opportunity to spot an error before a full month's overpayment or underpayment has occurred. Check the tax code printed on that payslip against what your P2 says. If they match and you believe both are wrong, act immediately.
You can cross-reference what HMRC holds against your own view of your income using the salary tax calculator and, if you have multiple income streams, the multiple income tax calculator.
One Scenario That Makes This Concrete
Consider Marcus, a site manager earning £62,000 a year with a company van worth £3,600 in benefit-in-kind. His employer files the P11D correctly each July. But in January, Marcus receives a P2 showing a van benefit of £5,200, a figure from two years ago when he drove a different, more expensive vehicle.
HMRC's system has not updated following the P11D correction. Marcus's tax code has been reduced to collect tax on an extra £1,600 of benefit that no longer exists. At the higher rate of 40%, that is an extra £640 being collected from his salary across the year, roughly £53 per month disappearing for no reason.
If Marcus ignores the P2, he will eventually receive a P800 refund, possibly 18 months later. If he checks his tax code at /check-my-tax-code now and contacts his payroll team to confirm the correct P11D figure, he recovers that £640 immediately through a corrected code.
The difference between acting and waiting is not just financial. It is the quiet stress of every payslip being slightly wrong for over a year.
A Note on Digital P2 Notices
HMRC has been moving paper P2 letters online. If you have a personal tax account and have opted into paperless correspondence, your P2 will appear as a digital notification rather than a letter. The problem: HMRC's email alerts for these notifications are inconsistent. Some people receive them promptly, others find them sitting unread weeks later.
If you have not received a paper P2 and you are a PAYE employee, log in to your HMRC personal tax account and check the "Letters" section. Do this every January. If your code has changed since last year but you cannot see a P2 explaining why, that is itself a red flag worth investigating. The post Why Is My Tax Code Different This Year? covers the common triggers in full.
What Happens After You Challenge
If HMRC agrees with your challenge, they will issue a revised P2 with a corrected tax code. They will notify your employer automatically via PAYE Real Time Information. You should see the corrected code on your next payslip.
If the correction means you have already overpaid in the current tax year, HMRC will usually adjust your code to repay it through your remaining payslips rather than issuing a cheque. If you have overpaid across a previous tax year entirely, you may receive a P800 refund letter instead.
Either way, the process is manageable. What is not manageable is discovering a year-long overpayment when you are trying to remortgage or budget for something important.
The P2 Is a Prompt, Not a Verdict
That letter on your kitchen table is not HMRC telling you what you owe. It is HMRC telling you what they plan to collect, based on information that may or may not be accurate. The distinction matters. You have every right to check it, question it, and correct it.
Check your current tax code at /check-my-tax-code before 6 April. Two minutes now could save you hundreds of pounds across the coming year, and spare you the peculiar irritation of waiting 18 months for a refund you were never supposed to need.
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