HMRC’s Annual Coding Process Expanded

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On an annual basis, through February and March, HMRC perform their ‘coding run’, a time when allowances are reviewed to take effect from the start of the following year. In 2026/27, this will not impact anyone in receipt of a standard Personal Allowance (codes suffixed L, M and N).

However, it will impact the following with the result employers will receive tax codes to adjust those in receipt of:

  • The Blind or Married Couple’s Allowance (which are increased);
  • Taxable State Pension / benefits (which inflate from April 2026)

There are many more reasons why the employer may receive a received tax code, issued as a P9, and the employee may receive a copy, issued as a P2.  HMRC advises the 2026/27 annual coding run will be expanded to remove the following items:

Employment Expenses

Where the tax code indicates there are employment expenses over £120.00, these will be removed if the taxpayer meets one of the following criteria:

  • There is no current PAYE income recorded on HMRC’s systems; or
  • There has been an employment gap of a full tax year since employment expenses were claimed; or
  • There has been no Self-Assessment activity since 2021/22 but HMRC believe a return should have been submitted; or
  • The tax code shows employment expenses are higher than those in the taxpayer’s 2023/24 tax return

Higher Rate Gift Aid Relief

Gift Aid is given at the Basic Rate (20%), however, for taxpayers who pay Income Tax at one of the higher rates, this can be claimed via the Self-Assessment return or contacting HMRC.  Where Gift Aid relief is given at one of the higher rates, this will be removed if the taxpayer meets all the following criteria:   

  • The value has not changed for at least three years; and,
  • The taxpayer is not recorded as having filed a Self-Assessment tax return for at least three years 

For Bookkeepers

This seems a sensible tidying and ‘cleansing’ of HMRC’s systems which may be including outdated data in tax codes.  It also targets those that have not completed a Self-Assessment tax return where these reliefs are generally claimed.

The messages to members are to expect more tax code adjustments in 2026/27 and, of course, more queries from employees! If they believe hat HMRC has removed items incorrectly, they need to be claimed again. 

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