It is the one document that shows the maths behind your tax code, every allowance added and every deduction taken. Most people bin it. The ones who read it catch HMRC's mistakes.
A letter arrives from HMRC, usually in late winter or after a job change, headed "PAYE Coding Notice". Most people glance at the code at the top and recycle the rest. But the paragraphs underneath are the only place HMRC shows its working, and that working is wrong far more often than people assume.
The P2 is essentially a recipe. It starts with your tax-free allowances, headed by the £12,570 Personal Allowance for 2025/26, then lists anything that reduces them. Typical deductions include the cash value of a company car or private medical insurance, untaxed interest, or an adjustment to collect tax you underpaid in a previous year.
HMRC subtracts the deductions from the allowances to reach your tax-free amount, then drops the final zero to produce your tax code. Allowances of £12,570 with no deductions give a code of 1257L. Deduct a £2,000 company benefit and you get £10,570 of allowance, a code of 1057L.
HMRC issues a Notice of Coding whenever it sets or revises your code. The most common trigger is the annual refresh before the new tax year, but a notice also lands when you start a job, gain or lose a taxable benefit, or when HMRC decides to recover an earlier underpayment through your code.
Because the notice is generated from data HMRC holds, including employer reports and estimates, it can lag behind reality. A company car you returned last year, or an estimated bonus that never materialised, can sit in the deductions for months unless you flag it.
Aisha's 2025/26 Notice of Coding shows a £12,570 Personal Allowance, then two deductions: a company car benefit valued at £3,200 and an "estimated untaxed interest" entry of £370. HMRC subtracts £3,570 from £12,570, leaving a tax-free amount of £9,000 and a code of 900L.
When Aisha reads it carefully, she realises she gave the company car back in March and no longer has it. The £3,200 deduction is stale. She reports the change through her Personal Tax Account, HMRC reissues the notice with the deduction removed, her allowance returns to roughly £12,200, and her code rises to around 1220L, cutting her monthly tax. Had she ignored the letter, she would have overpaid all year and waited for a P800 refund. The check my tax code tool walks through exactly which deductions to question.
The code at the top of a P2 is HMRC's conclusion. The deductions underneath are its assumptions, and assumptions are what you check.
HMRC increasingly delivers coding notices online through your Personal Tax Account rather than by post, especially if you have signed up for digital communications. Whether it arrives as paper or a PDF, the structure is identical: allowances minus deductions equals your tax-free amount and code. If you have multiple employments or pensions, you may receive several notices, one per source, and the allowance is usually given against your main income with the others coded BR, D0 or similar. Our full guide to UK tax codes explains how those secondary codes fit together.
TapTax connects to your bank, categorises expenses automatically, and submits quarterly updates to HMRC. Free plan, no card required.
