Coding: codes: how they are used and calculated: issuing and amending a tax code
Note. From 6 April 2016 the Scottish Government became responsible for setting its own rates of income Tax. Where the Scottish rate of income tax is applicable we will include an S prefix to the tax code. The total rate for Scottish taxpayers is the amount of income tax a Scottish taxpayer will pay on their non-savings and non-dividend income.
All savings and dividend income is taxed at the same rates for all taxpayers regardless of the taxpayer’s residency status.
Since 6 April 2016 banks and Building Societies have paid interest gross.
HMRC is responsible for identifying if an individual is a resident of Scotland and entitled to the Scottish rate of income tax.
Further information on the Scottish rates of income tax is given at PAYE100035
Making amendments to a code for CY and CY+1
When making amendments to a code for CY and CY+1
- Check that you have details for the correct individual
- Check the ‘Indicators’ screen
- If the RLS indicator is set, no advisory message is being displayed for the form P2 (notice of coding) to tell you that the P2 output has been suspended. Once a new address is recorded WMI215 (Action guide tax40297 (AA) and / or tax41050(AO)) will be generated. For more information about suspended output see PAYE106010
- Check Contact History and P11D information
- Check details recorded on the income, allowances, benefits and deduction area (IABD) in NPS
- Where there is more than one live employment record held under the same employer PAYE reference and you have evidence that there may be duplicate employments held for that employer reference, care must be taken to ensure the correct employment(s) are deleted. See Action guide tax40003
- Consider using the User Calculation Assistant tool (UCA), this will present you with tax table checks and help you to determine previous pay and tax on ceased employments, and the basis of operation for revised tax codes
When you issue a revised tax code you must determine whether the revised tax code should be issued on a cumulative or on a
week 1 / month 1 basis. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
- Check the record to determine whether the revised code will be the first tax code issued by HMRC, or whether HMRC have previously issued a tax code for the employer / pension provider
If a tax code has not been previously issued by HMRC you must review the start tax code for the employment
- This can be reviewed by selecting the Edit Record icon next to the relevant employment on the Employment Summary screen. If the revised tax code is calculated as being lower than the start tax code it must be issued on a week 1 / month 1 basis (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
This is particularly relevant when issuing a tax code for new pensions as the start tax code for all new pensions is PA on a week 1 / month 1 basis, regardless of whether a primary or secondary employment is held.
- If HMRC has previously issued a tax code the basis of operation will be automatically calculated, so if the revised tax code is calculated as being lower than the previous cumulative tax code it should be calculated on a week 1 / month 1 basis. However, you must ensure that this has happened before issuing the revised tax code
- If you have inserted an employment and you do not know what tax code is currently being operated by the employer, you should review the P14 SUMMARY / END OF YEAR RECORD SUMMARY screen to see if P14 details have previously been received for that employment. If a P14 has been received, the tax code shown will give an indication of whether the revised tax code needs to be issued on a week 1 / month 1 basis
- If you have inserted an employment and a P14 has not been received for the employment and you do not know what tax code is currently being operated by the employer, you must always issue the tax code on a week 1 / month 1 basis
Changes from 02 July 2017
From 02 July 2017, when we amend a customer’s code we will carry out a full calculation for the year. Where extra tax is due the new code will include an In Year Adjustment (IYA) and In Year Adjustment Restriction (IYAR) to collect the extra tax over the remaining weeks or months of the tax year. The tax code will be operated on a week 1 or month 1 basis. This should mean that most of our customers pay the right tax and will not be overpaid or underpaid at the end of the tax year.
From the above date we will not calculate any further Potential Underpayments (PUPs) in tax codes. We will refer to the extra tax due as an In Year Adjustment (IYA) and the coding restriction will be described as In Year Adjustment Restriction (IYAR).
Transitional year 2017-18
Until 02 July 2017, when we amended a customer’s code and operated the new code on a week 1 or month 1 basis, we calculated a potential underpayment (PUP) relating to the extra tax due for the earlier part of the year. PUPs created in the period 06 April 2017 to 01 July 2017 will be carried forward for collection through the code in 2018-19.
From 02 July 2017, we will not create PUPs. These will be replaced by In-Year Adjustments (IYAs). From that date, if we amend a code that includes a PUP, HMRC’s In-Year Calculator will do a full year calculation and work out whether the customer has paid the right tax to date. If extra tax is due, an In-Year Adjustment (IYA) will replace the existing PUP. You will not see a code including both a PUP and an IYA during the 2017-18 year.
Last operated tax code
Each time a tax code calculation is triggered the PAYE Service will make a decision about the new tax code, based on the last tax code operated by an employer / pension provider.
In all instances, the last operated tax code is defined as the last tax code calculated where the basis of operation is set to cumulative or week 1 / month 1.
Where the revised tax code is less than the last cumulative tax code operated, the revised tax code should be issued on a week 1 / month 1 basis.
When a primary source changes within a tax year, and a new tax code calculation is required, the last operated tax code will be the tax code calculated against the ceased primary source. The new primary source will have a start tax code and this is the tax code the new primary source will be operating. If the start tax code is not populated then the tax code from the ceased primary source will be used.
‘Not operated’ status tax codes
Each year at annual coding the PAYE Service will compare the new CY+1 tax code against the latest CY tax code operated. The PAYE Service will ignore any tax codes calculated with the ‘not operated’ status set and will go back to the latest CY tax code issued without the ‘not operated’ status.
For example, a tax code has been calculated CY on 1 January of 747L, the CY tax code was then amended to Code NT on 1 February but the ‘not operated’ status was set. At annual coding the PAYE Service would ignore the 1 February Code NT tax code calculation and base the CY+1 tax code on the 1 January 747L tax code calculation.
Note: You should take extra care when amending tax codes and only set the ‘not operated’ status when applicable, see PAYE11060 for further guidance.
Process to issue a tax code
The process to issue a tax code is as follows:
Access the income, allowances, benefits and deductions (IABD) Landing screen, select the relevant entries for Form Type and Tax Year. More information about the IABD Landing page is at PAYE130010. The Form Type ‘Calculation Only’ will trigger a coding calculation using information already recorded on the system.
To update details and issue a new tax code, select the appropriate Form Type and Tax Year from the drop down and make entries in the relevant IABD area. For example access ‘Allowances’ and enter details of a new amount of Charitable Donation payments made. More information on how to make entries is at Action guide tax40002. When the [Save] button is selected the IABD Landing screen is redisplayed with ‘SAVED’ in the status column.
Once the correct entries have been made on the IABD Landing screen, ‘Submit’ the entries to be saved on the system, Contact History will then be displayed. Enter the relevant Contact History details, more information about how to make entries is at PAYE105001. When Contact History is completed and saved a tax code calculation will be generated.
Entries on the IABD Landing screen will be required for each year that a code calculation is required. Where appropriate, entries made in CY will be carried forward to CY+1. Where entries are not required in CY+1 or a different amount is required in CY+1 then delete or enter the new amount in the CY+1 IABD screen. It is very important to review IABD for CY+1 as not all of the IABD CY updates carry forward automatically.
Enter income in the Non Coded Income field on IABD in the Earnings page that should not or cannot be coded. For example non-PAYE income that the individual has objected to being included on their SA return, foreign income in SA cases or any type of income that needs to be included in total income calculations, but should not be included as a tax code item. The Tax Code details screen will be displayed with a summary of the tax calculation in the top half of the screen followed by specific details of the tax calculation below. To the right of each row is a link that navigates the user to the Tax Code Details screen to display details about that tax code. On the Tax Code Details screen are links to calculations used in determining the tax code
- View Total Liability calculation - an estimate of the total tax to be paid based on PAYE income, benefits and kind, non-coded income and investment income
- View Adjusted Net Income calculation - an estimate of the income used in the calculation of age related allowances
- View Employment Liability calculation - an estimate of the PAYE tax to be paid on the PAYE employment income
For Personal Pension Relief, Charitable Donation Payments and Higher rate adjustment a link to the right of the allowance will display the coding calculation screen for the selected item.
For Personal Pension Relief and Charitable Donation Payments where there is no higher rate liability the source amount will be populated with the amount paid and the allowance amount will be zero. The P2 will not print these notes where the individual is not higher rate. Higher rate adjustment is displayed on the Tax Code Details screen as a deduction type, because the adjustment is calculated from a mixture of investment income details entered in income, allowances, benefits and deductions no source amount will be displayed.
The calculations are provided for illustrative purposes only to help with coding enquiries. The calculations are based on estimated income and tax figures; the correct tax liability will be reviewed at the end of the tax year when actual income details are known through the end of year reconciliation (PAYE93001) or Self Assessment tax return.
The bottom of the screen will display an Issue Forms section. The Issue Forms section provides two drop downs that allow you to issue or prevent a P2 or a P6 / P9 from being issued at this point. Where the Manual Code indicator is set any amendments to daily coding will default the P2 issue to not issue. Where a P2 is to be issued, change not issue to issue. The tax code calculation will look back at the last calculated tax code to work out the basis of operation, potential underpayment, and whether a P2 or P6 / P9 is issued or not.
Any later tax code calculations made on the same day will look back to the last tax code calculation made on the same day and then work out any further adjustments to the basis of operation, potential underpayment and issue of form P2 or P6 / P9. For example the first tax code calculation on a particular day calculates the tax code is 652L made up of professional subscriptions £50, personal allowance 6,475 on a cumulative basis and both P2 and P6 / P9 are set to issue. The tax code is amended to delete professional subscriptions £50 and replaced with job expenses £50, there is a change to the P2 but no change to the tax code to the employer. The P2 will be set to issue (The first P2 for the employment will not be issued) but the P6 / P9 will be set to issue.
Where the advisory message ‘Employer Output Inhibited’ is displayed the P6 / P9 field will be set to ‘Not issue’. This advisory message will be displayed if ‘issue’ is selected in the P6 / P9 drop down box. The Employer Output will be inhibited in the following circumstances
- Annual or Budget Coding review delays the issuing of Notices
- The Manual Code Indicator is set against the individual
- The Tax Code Calculation does not produce a change to the tax code, tax code suffix or basis of operation of the Tax Code
- The date of the Tax Code Calculation is after the 13 March for each tax year and the tax code has been calculated for CY
- The employment is ceased, for further guidance see PAYE64066
- The Manual Correspondence to Employer indicator is set
- There is no Employer correspondence address
- The Employer’s correspondence address is marked as RLS
- The Employer is marked as deceased
- The Employer is for Lump Sum Pension from DWP (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
- There is an invalid UBO code held in the Works Number field
Where the Manual Code indicator is set against the individual, and you wish to issue a form P6 in the current year, and manual correspondence is not required, you should review whether the Manual Code indicator is still required
If the Manual Code indicator should no longer be set
- Delete the Manual Code indicator and issue the tax code
If the Manual Code indicator should remain set
- Remove the Manual Code indicator
- Issue the tax code
- When the Tax Code Details screen has been submitted, immediately re-set the Manual Code indicator
This action is not required when amending the CY+1 tax code. Coding notification will be produced at annual coding, where appropriate.
Check Employer Business Service (EBS) for information why the P6 / P9 has been inhibited, for example employer RLS, deceased or no correspondence address and try and find a later address to reissue the P6 / P9. PAYE106001 gives more information about re-issuing correspondence.
You can also access the P2 special notes area from the [Notes] button. The [Notes] button will only be available when a P2 is to be issued. The [Notes] button also allows access to the fields to enter details of previous pay and tax that are to be included on a P6 to the employer so you will always need to issue a P2 where a P6 includes previous pay and tax. For example when you issue a duplicate P6 that includes previous pay and tax. Consider setting the special note ‘cumulative’ for these cases.
Where the system calculates that the tax due for the individual is equal or more than 50 per cent of their total income the system will inhibit the code issue. In these cases you will need to remove any non-PAYE income or underpayments included in the code calculation. On the income, allowances, benefits and deductions area make the appropriate entry in the Non Coded Income field (PAYE130035).
Note: where an employer is operating cumulative PAYE and pay and tax from a previous employment are included in the coding calculation, the employer should not include the previous pay and tax in their FPS.
Where the system calculates that the tax due for the individual is equal or more than 50 per cent of their taxable pay for that employment the system will generate an advisory message. Take the action given in Action guide tax40002 in these cases.
After the [Submit] button has been selected on the Code Details screen the Edit Employment Allocation screen will be displayed. From the Edit Employment Allocation screen you can
- View a list of the current live employments
- Amend the allowances given to a secondary employment
- Amend a tax code suffix
- Override a tax code
- Change the basis of operation of a tax code
If any amendments to the displayed code are made, the [Submit] button will be greyed out. Select the [Recalculate] button and the system will calculate the new tax code.
Note: If you select the [Recalculate] button to calculate a new tax code, any P2 special notes that were previously selected will need to be re-entered. NPS will recognise that a new tax code has been calculated and will clear any previously selected special notes.
Select the [Submit] button to record the change or continue to the next step if no change has been made.
Where there is more than one coded source access each source to review the Issue Forms P2 or P6 / P9 section. The Issue Forms section provides two drop downs that allow you to issue or prevent a P2 or a P6 / P9 from being issued at this point. For records that have multiple employments / pensions at the same employer reference then the system will issue a P2 and P6 / P9 for each employment / pension where the tax code has been changed.
Amending code NT
If code NT is no longer appropriate you should follow Action guide tax40002 to revise the tax code.
Amending override code 0T
When an unsigned form P46 / Starter information is received, tax code 0T week 1 / month 1 will be set as the override tax code. For more details see PAYE61030. If tax code 0T is shown as the override tax code on the Employment Allocation screen in IABD, you must not manually change it unless you have full income details for all employment sources. This is to ensure the correct tax code is calculated for each source of income.
To override tax code 0T with tax code BR, where you have full income details for all employment sources, you should
- Calculate the tax code
- Select [Submit]
- In the Employment Allocation screen select the ‘Override’ drop-down for the relevant employment and select the first option shown as follows ‘- -‘
- Select [Submit]
Tax code BR should now be calculated, to replace tax code 0T.