These tell the taxpayer, and in due course their employer, how much tax to take off their pay under PAYE.

So what if you received one of these codes?

First thing to check is for which year it is. The tax year is top right of the code.

Many of the codes issued around now are for the new tax year 2007/08. For monthly paid people this means the April payslip.

The code is issued early to give you and the Revenue a chance to correct any mistakes before the code is used.

A tax code is used with the PAYE system to decide how much tax to take off your pay each week or month. For many people their code changes little each year, but for others the code needs careful checking and adjustment.

A code is a way to deduct roughly the right amount of tax each year. For some people there will still be a tax bill or refund produced at the end of the year, perhaps after the tax return is submitted.

What makes up a code?

Firstly, for your main job (unless you receive a pension) you will have your personal allowance. This is £5,225 for the new 2007/08 year.

Other allowances may be added on ? typically for uniform expenses, small tools or professional subscriptions which you pay.

Thus you will have a total amount of tax-free allowances for the year.

From this total the Revenue may deduct various things. This is a way of extracting extra tax from you.

Deductions from your tax-free allowances can include:

Company car benefits;

Private medical insurance benefit;

Untaxed interest;

Income from rents;

Adjustments to collect tax from a previous year.

In the first four cases the amount deducted in working out your code is only an estimate. It may be a guess from the taxman and it may be based on last year's figure or tax return. You can ask to have the estimate changed to a better one.

Special care should be taken with company cars. Often the Revenue's information is not up to date.

If you have a code for 2007/08 then check that the car benefit figure ties up with the car you will be driving after March 2007. Your tax office will help you check that the numbers tie in. Try to have for them the CO2 emission figure for the car and its new list price.

Adjustments to collect unpaid tax can be very confusing.

Sometimes they arise from you having sent in a tax return and asked for the bill to be collected via your code. So when your 2005/06 tax was worked out your code to collect it will be the 2007/08 one.

Another tax adjustment can arise because your tax code was reduced in the middle of the previous tax year.

In that case the code being reduced would have said words to the effect of 'we reckon you may owe £167 for the year before this new code is operated'. Where you got a code like this then the next year's code will try to collect that same £167.

When the total allowances for the code are added up, and the deductions taken off, then you get a figure for net tax allowances. Divide that by 10 and you get the code.

Strictly what happens is the Revenue knocks off the last number. So net allowances of 2398 makes a code of 238L. You do not need to worry about the different letters which might appear after the numbers.

Tax on company cars is so high these days that deductions can be higher than the allowances. In this case the figure for net allowances is in fact negative. Where this happens the resulting code will have a K at the start ? for example K123.

If you do not understand your tax code do not ignore it ? contact the tax office. If you are worried that they will baffle you on the phone then write to them and ask for a written explanation of your tax code.

Adrian Huston, a former tax inspector, is now a partner in Belfast tax and accountancy firm Huston & Co LLP. To contact Adrian phone 028 9080 6080.