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HMRC internal manual

PAYE Manual

Coding: coding deductions and expenses: other deductions

Some PAYE individuals have additional sources of taxable income which are paid gross. Making a deduction from the individual’s coding allowances can often collect tax on such income. The extra tax paid on the PAYE source covers the tax due on the secondary source. Income treated in this way is said to have been ‘covered by allowances’ or ‘coded out’.

More information is available on the following

Jobseeker’s Allowance

Some codes need to be adjusted because of Jobseeker’s Allowance (Jobseeker’s Allowance here covers all taxable benefits paid to the unemployed). The P2 notice of coding will show Jobseeker’s Allowance.

Jobseeker’s Allowance is paid by the Department for Work and Pensions (DWP) who operate a modified version of PAYE. In Northern Ireland payments are made by Benefits Support Branch (Northern Ireland).

If an individual is also an occupational pensioner then refer to SPD 6g.

As a rule, the Benefit Office will tell you the figure of taxable benefit at 5 April or at the end of the claim. In the meantime you may have to estimate the figure so that you can adjust the code. If so, use the rates given on the form P242. Where the individual claims that some or all of the benefit is not taxable, ask for details of the type and amount of benefit received. Follow the rules in the Employment Income (EIM) Manual at EIM76220 onwards to decide whether any of the benefit is taxable.

State pension / benefit

The state pension / benefit is chargeable to income tax as pension income under Part 9 Chapter 5 ITEPA 2003 (see EIM74600). State pension / benefit is paid gross and not under deduction of tax.

Most pensioners who are liable to pay tax will normally have an additional source of income on which PAYE is operated. Where there is a source on which PAYE is operated, for example an occupational pension, then HMRC has a duty to try and collect at that source, not only the tax on the occupational pension but also the tax on the state pension / benefit. This is done by adjusting the code to reflect the state pension. The authority to include state pension / benefit in the code is given in the PAYE regulations at Statutory Instrument Regulation SI 2003 No.2682 14(1)(b).

State pension / benefit should be included in the code whenever possible.

Where the recipient of the state pension / benefit is liable to tax, but has no PAYE source where the tax in respect of the state pension / benefit can be collected, the tax can only be collected through self assessment.

State pension / benefit must only be coded out on or after the date it becomes due.

IABD

Care should always be taken when entering or updating state pension details in IABD. It is important that state pension details are always entered correctly to

  • Ensure that the tax code is correct
  • Ensure that annual coding calculates the correct amount of state pension for CY+1
  • Ensure that the end of year reconciliation includes the correct amount of state pension

When dealing with state pension cases you should follow the guidance at PAYE130065 and PAYE130067.

Statutory Sick Pay / Statutory Maternity Pay (SSP / SMP)

The Employment Income Manual (EIM76350 - EIM76361) explains how these payments are made. Details of the employer’s duties and what to do when an enquiry is received are also given at PAYE72075.

Normally coding will not be affected as PAYE operates on such payments. But you may receive a few notifications about payments made by DWP. To code out payments for the current year follow action guide tax40002.

Tips

Code out tips unless an employer or troncmaster has taxed them under PAYE. Take care when you first code out tips. Use a reasonable figure for the first year based on any estimate provided by the individual.

Groups of employees who regularly receive tips often have someone who will discuss for them how their tips are to be taxed. This person should be able to give you the information you require, including

  • The classes of employees who regularly receive tips
  • The average amounts received

You can accept any information obtained in this way (it saves having to issue personal returns to individual group members). However, report the facts to Personal Tax Customer, Product & Process, PAYE Technical, Shipley and await advice before you revise the coding where

  • You expect employees to receive an appreciable amount of tips
    And
  • The employees’ representative(s) fail to agree on an average amount for coding