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HMRC internal manual

PAYE Manual

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HM Revenue & Customs
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Coding: codes: how they are used and calculated: deductions - how to calculate

The table below shows deductions and how they are calculated, with links to further guidance on the topic from within this Manual.

Note: From 6 April 2016 the Scottish Government will be responsible for setting their own income tax rates for basic, higher and additional rate bands. Where the individual’s sole or main place of residence is in Scotland their tax code will include an S prefix for example, S1100L, SBR, S0T and the appropriate Scottish tax rates for Scottish taxpayers is used to calculate the deductions for non-savings and non-dividends income.

There is no S prefix for code NT. Code NT is used by all taxpayers regardless of where they live.

Where savings and dividend (Investment) income exceed Personal Savings Allowance and Dividend Allowance (with effect from April 2016) all taxpayers are taxed at the same rate regardless of their residency status.

P202: deductions

Description used on coding notices Circumstances Deduction
Your State Pension / State Benefits All cases Deduct the amount receivable for current year, estimated where necessary. Note: The source amount of state pension / state benefits may differ from the coded amount because of the uprating process using old and new weekly rates. PAYE130065
Public Service pension Public service pensions coded out Deduct estimated gross amount receivable in current year, taking into account annual rate of increase where appropriate. PAYE130065 and PAYE76130
Forces pension Forces pension coded out Deduct estimated gross amount receivable current year, taking into account annual rate of increase where appropriate. PAYE130065
Taxable Incapacity Benefit or Employment and Support Allowance Taxable benefit coded out The source amount of incapacity benefit may differ from the coded amount because of the uprating process using old and new weekly rates. PAYE130075
Married Couple’s Allowance to your wife Couple where either the husband or wife were born before 6 April 1935 and the date of marriage is before 5 December 2005 and the wife has elected to have half the Married Couple’s Allowance set against her income, or the husband and wife have jointly elected for the wife to receive the whole of Married Couple’s Allowance Deduct half or whole of the minimum amount of the Married Couple’s Allowance (but not the age-related additions) which have gone to the wife. PAYE130025
Marriage Allowance Couples must be married or in a civil partnership. Have an income of £11,000 or less. Spouse/civil partners income must be between £11000 and £43000. Neither customer can already have a live MA application on their account. Neither customer can be in receipt of Married Couple’s Allowance (MCA) The transferor will give 10% of their personal allowance to their spouse/civil partner. PAYE100060
Estimated Jobseeker’s Allowance Jobseeker’s allowance coded out - where: Deduct:
  * Taxpayer is occupational pensioner, or part-time worker Estimated jobseeker’s allowance receivable for current year
  * BA has not operated PAYE Amount notified by BA
    PAYE130075
Interest without tax taken off (Gross Interest) Tax Due on untaxed savings income. Savings income is taxed at the same savings rates for all taxpayers regardless of their residency status. From April 2016 the Personal Savings Allowance (PSA) means that basic rate taxpayers can receive up to a £1,000 and higher rate taxpayers can receive up to £500 of savings income (such as interest from a bank account) without tax being due. There is no PSA for additional rate taxpayers.  
For 2016-17 only, PSA is shown in the Tax Code details as an allowance but for 2017-18 onwards, PSA is used to reduce the amount of Untaxed Interest, applying tax to interest remaining after any allowances. PAYE130060    
    * Where the untaxed interest is covered by allowances in the code No adjustment necessary to the amount of savings income to be coded out
    * There are allowances and a balance of savings rate band Amount of savings income covered by allowances plus the balance available at the saving rate x 10/Basic rate band
    * There is a balance of savings rate band Adjustment to balance of savings rate band x 10/Basic rate band
    * Estimated highest rate for both taxable and main employment is 20 per cent No adjustment necessary to the amount of savings income to be coded out
    * Estimated liability on taxable income is at higher rate PAYE130060
  Dividend Allowance Tax due on untaxed dividend income. Dividends income is taxed at the at the same dividend rates regardless of their residency status. From 6 April 2016, the Dividend Tax Credit will be abolished and a new £5,000 Tax Free Allowance for Dividend income will be introduced. The new rates of tax on Dividend income above the allowance will be 7.5% for dividends taxed in the basic rate, 32.5% for dividends taxed in the higher rate and 38.1% for dividends taxed in the additional rate. Deduct: No adjustment necessary to the amount of dividend income to be coded out PAYE130030
    Example HR taxpayer with income of £10,000, dividends £70,000 has a total income of £80,000 - less personal allowance £11,000, less Starter Savings Rate (does not apply as income greater than £16,000) leaves £69,000 taxable.  
    £5000 x 0% = £0 (Dividend Allowance)  
    £27,000 x 7.5% = £2025  
    £37,000 x 32.5% = £12025  
    Total tax due = £14050  
  Foreign Dividends and Interest Where foreign dividends and / or taxed interest from abroad is received and individual liable at the higher rate and / or additional rate on all or part of the income (except income taxed on a remittance basis). All savings and dividend income are taxed at the same rates regardless of the taxpayers residency status.  
    ### Foreign Dividends  
    Calculate tax due (Dividends plus 1/9 UK tax credit) at 32.5 per cent (or the higher rate of 42.5 per cent for 2012-13, 37.5 per cent for 2013-14) = (A) Deduct UK tax credit and foreign tax paid = (B) (To a maximum of liability and apportioned if necessary). Estimated liability at coded source is:  
    * Liability at Basic rate Coded value is 100/Basic rate
    * Liability at Higher rate Coded value is 100/Higher rate band
    * Liability at Additional rate Coded value is 100/Additional rate band
    Foreign dividend income is taxed at the same rates for all taxpayers regardless of the taxpayers residency status  
    ### Foreign taxed interest  
    Calculate tax due at Highest tax rate on gross interest (all or part) = (A) Deduct foreign tax paid = (B) (To a maximum of liability and apportioned if necessary) Estimated liability at coded source is:  
    * Liability at Basic rate Coded value is 100/Basic rate band
    * Liability at Higher rate Coded value is 100/Higher rate band
    * Liability at Additional rate Coded value is 100/Additional rate band
    Foreign investment income is taxed at the same rates for all taxpayers regardless of the taxpayers residency status  
  Allowance restriction Where an allowance is present for any of the following for which relief is restricted to 10 per cent  
    Married Allowance - all versions for husband or wife or civil partner. Maintenance Payments The amount of allowance restriction calculated by the computer will be
      * For an individual liable at basic rate only - the restriction is the allowance x 10/Basic rate
      * For an individual liable at higher rate - the restriction is the allowance x 30/higher rate
      * For an individual liable at additional rate - the restriction for 2012-13 is the allowance x 40/additional rate. For an individual liable at additional rate - the restriction for tax years 2013-14 onwards is the allowance x 35/additional rate
    Note: We do not show the allowance restriction, just the net figure and explain what the allowance is worth in terms of tax PAYE10020
  Other Earnings Other (earned) income. Not covered by Self Assessment. Deduct estimated gross amount receivable current year. (Normally this will be the previous year’s amount unless it is likely to vary substantially) PAYE130035
  Reduction to collect Unpaid tax (£ tax unpaid) Where taxpayer is NNL No adjustment is necessary
    Estimated taxable pay at main source (after taking into account any adjustment for charges) is Adjustment is calculated as below:
    * Chargeable at Basic rate Underpayment x 100/Basic rate
    * Chargeable at Higher rate Underpayment x 100/higher rate
    * Chargeable at Additional rate Underpayment x 100/additional rate
      PAYE12070
  Reduction to collect High Income Child Benefit Charge Adjusted Net Income is in excess of the minimum income limit, and estimated pay at main source is Adjustment is calculated as below:
    * Chargeable at Basic rate Child Benefit Charge x 100/Basic rate
    * Chargeable at Higher rate Child Benefit Charge x 100/Higher rate
    * Chargeable at Additional rate Child Benefit Charge x 100/Additional rate
      PAYE14015
  Other earnings (or pension) Allowances allocated from the primary source to secondary source(s). This is not used for transfer of allowances between spouses Calculated by allowances less estimated pay PAYE11055
  Savings Income Taxable at higher and / or additional rate tax (In this case UK refers to customers in England, Scotland, Wales and Scotland) Where there is savings income and liability is at higher rate To calculate the deduction manually
    * UK Taxed Interest Gross UK Taxed Interest x highest tax rate per cent = (A) tax due (A) minus tax deducted at source= (B) tax due. Tax code adjustment = (B) x 100/highest tax rate at primary employment
    * UK Dividends Gross UK Dividends x dividend highest tax rate per cent = (C) tax due. (C) minus lower dividend tax credit deducted = (D) tax due. Tax code adjustment = (D) x 100/highest tax rate at primary employment
    The system will calculate the appropriate deduction using savings income entered in IABD. All savings and dividend income is taxed at the same rates for all taxpayers regardless of the taxpayers residency status PAYE130060
  Adjustment to Basic Rate Band -up to 5 April 2011 Allowances or code BR at secondary source and individual liable at higher rate. The system will calculate the appropriate deduction using estimated pay details held on the record To calculate the adjustment manually. Work out the tax due from all sources as a whole. Work out the tax due for each source separately - add these together. Multiply the difference between these two amounts by 100. Divide this by the rate of tax at the main source - the result is the amount of adjustment needed
  Adjustment for Tax rate bands, from 6 April 2011 Allowances, code BR, SBR, D0, SD0 or D1, SD1 at a secondary source and the individual is liable at higher rates. Where the tax code has an S prefix the individual is liable Scottish higher rate. The system will calculate the appropriate deduction using estimated pay details held on the record To calculate the adjustment manually
    Example (2013-14 rates)  
    Step 1 Total taxable pay - 152,000 Calculate the total taxable pay from all sources, and the tax due on this total
    32,010 x 20% = 6,402  
    117,990 x 40% = 47,196  
    2,000 x 45% = 900  
    Total tax = 54,498  
    Step 2 Primary 27,000 Code 0T Calculate the total tax due for each source separately, using the tax rate as the rate each secondary source of income falls into
    27,000 x 20% = 5,400  
    1st secondary 18,000 x 20% = 3,600  
    2nd secondary 10,000 x 40% = 4,000  
    3rd secondary 97,000 x 40% = 38,800  
    Total tax 51,800  
    Step 3 54,498 - 51,800 = 2,698 x 100 Minus step 1 from step 2 and Multiply the difference between the two amounts by 100
    Step 4 Divided by 20 = 13,490 ARB Divide this by the rate of tax at the main source - the result is the amount of adjustment needed. Note: Where an Adjustment to Tax Rate Bands restriction is required, the Tax Code Calculation will only include the estimated pay for ‘live’, ‘potentially ceased’ (P Ceased) employments.
  Widows and Orphans Adjustment From 6 April 2013 individuals will no longer be entitled to receive tax relief for these payments or subscriptions From 6 April 2013, no entitlement, therefore no adjustment will be required. You will be unable to amend or enter amounts in IABD for Widows and Orphans payments for tax year 2013-14 onwards
  Charitable Donations Adjustment. This is made up of ‘Gift Aid’ and ‘Gift Shares to Charity’ Payment to charities made under the Charitable Donations scheme may be treated as having been made after deduction of Income Tax at the basic rate for 2015-16 and earlier and 20% for 2016-17. However, usually an individual will have the opportunity to confirm whether or not they are a UK taxpayer when making the donation. If the amount of Income Tax or Capital Gains Tax actually payable is less than the tax reclaimed by the charity on the gift, then the customer will be liable to pay the tax reclaimed by the charity. The additional tax due is the difference between the tax reclaimed by the charity and the Income Tax and Capital Gains Tax due on the total income and chargeable gains No adjustment is necessary. NPS will not allow a ‘Charitable Donation Adjustment’ to be included in the tax code where the customer is not liable to pay income tax on their primary source income. You should update IABD with the ‘Charitable Donation Paid to Charity’ figure only, see PAYE130025, which will allow any additional income tax due to be calculated at auto-reconciliation