P2 Coding Notice Explained UK 2026/27 - How to Read & Challenge

A P2 Coding Notice is the letter HMRC sends explaining how your PAYE tax code is calculated. You receive a P2 every time your tax code changes - typically annually before each tax year and ad hoc when something material changes (a new benefit-in-kind reported, a Marriage Allowance election, a State Pension started). Most people don't read theirs. Doing so catches errors that quietly cost hundreds of pounds.

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What a P2 looks like

A P2 lists every component of your tax code calculation in plain (-ish) English. The structure:

Personal Allowance:                    £12,570
Plus: Marriage Allowance received:      £1,260
Less: Company car (£8,000 BIK):        -£8,000
Less: Medical insurance (£1,500 BIK):  -£1,500
Less: Underpayment from 2024/25:       -£1,000
                                       --------
Net allowance:                          £3,330
Tax code:                                  333L

Or if the deductions exceed the allowance:

Personal Allowance:                    £12,570
Less: Company car (£15,000 BIK):      -£15,000
Less: Beneficial loan (£800 BIK):        -£800
Less: Underpayment from 2024/25:       -£2,500
                                       --------
Net allowance:                         -£5,730
Tax code:                                K573

(K-codes are explained in our tax code K guide.)

When a P2 arrives

You should receive a P2 when:

HMRC issues your annual code before each tax year (typically late February to early April for the tax year starting 6 April).
You start a new job and your previous P45 hadn't yet generated a code.
HMRC adjusts your code mid-year because of:
- A new P11D benefit reported by your employer.
- A change in your benefits (you returned the company car).
- A Marriage Allowance election or cancellation.
- State Pension starting.
- HMRC catching up on a prior-year underpayment to recover.
You request a code review through your Personal Tax Account.

The P2 is delivered by post by default. You can opt into digital delivery via your Personal Tax Account - recommended, as it appears in your account for free 24/7 reference.

Reading the P2 - every component explained

A P2 generally lists:

Income

Income from main employment - your estimated salary at your primary employer.
Income from second job (if applicable).
Pension income (state pension, private pension).
Savings interest above the Personal Savings Allowance.
Dividend income above the Dividend Allowance.

HMRC's estimates can be wrong. If your salary changed or your investment income shifted, the P2 estimate may not match reality.

Allowances

Personal Allowance - £12,570 for 2026/27. Reduced if your income exceeds £100,000 (taper to zero by £125,140).
Marriage Allowance received - £1,260 added if your spouse transferred their allowance.
Blind Person's Allowance - £3,070 if registered blind or severely sight impaired.
Marriage Couple's Allowance - applies only if at least one of you was born before 6 April 1935.

Deductions (things that reduce your tax-free income)

Company car BIK - taxable benefit calculated from the car's P11D value × CO2-banded percentage.
Private medical insurance - premium paid by employer.
Beneficial loans - interest-free or low-interest loans above £10,000.
Living accommodation - employer-provided housing.
Other taxable benefits (gym memberships, vouchers, club memberships, transferred assets).
Marriage Allowance given - £1,260 reduced if you transferred your allowance to spouse.
Unpaid tax from previous year - HMRC collecting an underpayment via tax code.
Estimated savings interest tax - pre-collection of tax on savings interest above PSA.
Estimated dividend tax - pre-collection of tax on dividends above DA.
Higher-rate restriction on Marriage Allowance - applies if you receive Marriage Allowance and become a higher-rate taxpayer (the relief withdraws).

The arithmetic

Net allowance = Personal Allowance + Allowances − Deductions Tax code = Net allowance ÷ 10 (rounded down) + suffix letter (or K prefix if negative)

Common errors to look for

Read your P2 carefully for these patterns:

1. Old company car still on file

You returned the company car last year, but the P2 still shows the BIK adjustment. Result: your code is too low; you over-pay tax through PAYE.

2. Medical insurance no longer applicable

You left the job that provided medical insurance, but the new employer's P11D didn't include it (correctly). HMRC's record may still carry the BIK from the old employer.

3. Stale underpayment recovery

HMRC is recovering an underpayment from 4+ years ago that was already paid in full. Provide bank statement evidence of the original payment.

4. Wrong income estimate

HMRC has guessed your salary based on prior-year data. If you're now earning materially more or less, the savings/dividend tax pre-collection is wrong, and any income-based withdrawals (Marriage Allowance higher-rate withdrawal, taper threshold) may be miscalculated.

5. State Pension figure wrong

DWP feeds your State Pension entitlement to HMRC. If the figure is wrong (you deferred and re-elected, or you have years HMRC doesn't know about), the P2 deduction is wrong.

6. Marriage Allowance applied without your knowledge

If your tax code suddenly drops by ~£1,260 of allowance (gaining an N suffix), your spouse may have applied for Marriage Allowance without telling you. Not necessarily wrong - but check whether the situation still qualifies.

7. Higher-rate Marriage Allowance withdrawal

If you become a higher-rate taxpayer mid-year, HMRC withdraws any received Marriage Allowance via your code. Sometimes this happens incorrectly (a one-off bonus pushed you above the threshold but your normal income is below).

How to challenge a P2

If your P2 looks wrong:

Sign in to your Personal Tax Account at gov.uk/personal-tax-account.
Click "Check your tax code" - this shows the same calculation broken down.
For most adjustable items (BIKs you no longer have, income estimates, Marriage Allowance status), you can update directly from the PTA.
For more complex items (prior-year underpayment disputes, State Pension figure errors, contested BIK calculations), call HMRC on 0300 200 3300 with your NI number and PAYE reference.
HMRC re-issues a corrected P2 + P6 to your employer's payroll. The new code applies from the next pay cycle.

Why getting your P2 right matters

A wrong P2 doesn't just affect this month's tax. It compounds:

Over-deduction means PAYE collects too much tax monthly. You eventually get a P800 refund - but it's an interest-free loan to HMRC for up to 12 months.
Under-deduction means PAYE collects too little. HMRC reconciles via P800 underpayment letter, and either reduces your code next year (cashflow hit) or demands a lump sum (worse cashflow hit).
Wrong State Pension figure carries forward year after year if not corrected.

Setting up email notifications for P2 changes

Your PTA can notify you whenever HMRC adjusts your tax code. Enable this from PTA settings - it gives you visibility into mid-year changes you might otherwise miss.

Disclaimer

PayslipIQ provides automated educational guidance based on the figures you supply. It is not regulated tax advice. P2 calculations rely on data from your employer(s), DWP, and HMRC's own records - accuracy depends on those upstream sources. For substantial discrepancies or contested HMRC determinations, contact HMRC on 0300 200 3300 or use a CTA-qualified tax adviser.