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HMRC internal manual

PAYE Manual

HM Revenue & Customs
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Coding: coding deductions and expenses: introduction

A tax code can be used to code out PAYE deductions such as benefits in kind and, unless a customer objects, tax due on non-PAYE sources of income.

An individual may object at any time to the inclusion of non-PAYE income in a code and you must then amend the code to exclude such income. This right to object applies even if the individual has previously agreed to the inclusion of the income but then has a change of mind. The position is different for PAYE income such as benefits in kind, state pension or other state benefits included in a code. The Employment Income Manual (EIM) gives more information.

If the customer does not accept your decision, they have 30 days from the date you issue the decision letter within which to send you an appeal. Once they have appealed you may offer a review or the customer may request a review by HMRC. Alternatively they may appeal to the First-tier Tribunal - see ‘Appeals Review and Tribunals guidance (ARTG)’ for more information about what to do if you receive an appeal.

Employees and directors are entitled to a deduction for expenses necessarily incurred in the performance of their duties and these can be included in the code as expenses. This guidance tells you how to code the expenses due but the EIM explains how you decide if a deduction is due.

Scottish Rate of Income Tax

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 Scottish rate of income tax is applicable it will include an S prefix to the tax code.

The Scottish rate of income tax 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 regardless of the taxpayers residency status.

PAYE deductions and expenses will be coded out or reliefs given at the highest rate of tax the individual is liable, based on the tax rates of their residency status.

Further information is given at PAYE100035