Many of us who pay tax are aware of tax codes, but frequently forget just how they work. Sound familiar? If so, here is a quick summary of the key points.

Under the PAYE system, tax is deducted directly from your earnings or pension before you receive any money. The Inland Revenue gives your employer or pension provider a tax code to show how much tax-free pay you should get each time you get paid - tax is deducted from anything above this.

The key point to note is that if your tax code is wrong, you could end up paying too much, so double checking it could be a useful way of saving money!

The code itself is made up of numbers and letters and can be found on your payslip, on the coding notice you get from the Inland Revenue and the P60 you get after the end of the tax year.

For example, the number 647 should reflect how much tax-free pay you're allowed to earn in each tax year, £6,479 for 2009-10.

The tax code letter gives your employer further information on the type of allowances you receive or the rate of tax that should be charged. The key tax code letters are listed below.

BR or DO - All your pay from this source is taxed at the basic rate (BR) or higher (DO) rate. This is because your allowances have already been used up against your other income.

K - Total deductions exceed your allowances

L - You get the basic personal allowance for a person under aged under 65

NT -  You pay no tax on this income

P -  You get the full age-related personal allowance for someone aged 65-74

T -  Used if your tax office needs to review your tax code for whatever reason. You can also ask for a T code to keep your personal details confidential.

V - You get full age-related personal allowance for someone aged 65-75, and married couple's allowance, and you're likely to pay the basic-rate tax

Y -  You get the full age-related personal allowance for someone aged 75 or over

To calculate the proportion of your pay you will get tax-free, first you need to add up the allowances and reliefs to which you are entitled, for example the personal allowance.  Furthermore, if you pay certain expenses to enable you to do your job, such as membership fees to a professional or trade organisation, the Inland Revenue may also include these in the allowances and reliefs in your tax code.

Your tax code may be used to collect cash on fringe benefits from your employment, such as a company car, or income from other sources that is taxable but paid with no tax taken off. These are deducted from your allowances and give you the amount of tax-free pay you are entitled to in a tax year. Your tax code may also be used to collect other tax due such as tax that you may have underpaid in previous years or higher rate tax on savings.

Hopefully this is all a little clearer, so go and have a quick look to see if your code is correct!