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HMRC internal manual

PAYE Manual

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HM Revenue & Customs
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Coding: coding deductions and expenses: non-PAYE income

Statutory Instrument (SI) 2003 No.2682 Regulation 14 (1)(f) gives HMRC the authority to include income which is not PAYE income in the code. However it also allows the individual to object.

An entry in ‘Finishing your Tax Return’ page, TR6 Box 3 on the self-assessment tax return allows individuals to indicate to us that they do not wish non-PAYE income to be included in their PAYE code. In all cases you must check TR6 box 3 to decide whether or not any non-PAYE income should be coded.

Each year, TR6 box 3 will override what has happened previously as it is the customer’s latest election. If TR6 box 3 is ticked, you must not include any non-PAYE income in the code and you must remove any non-PAYE income from the CY and CY+1 codes. Any additional tax will be collected through SA

Do not set the Inhibit Auto Closure (ACI) signal. The ACI signal should only be set under the circumstances described at SAM101140.

The PAYE Regulations do not limit the amount of non-PAYE income that can be included in the code. However, for customer service reasons a limit of up to £10,000 (in terms of deductions) should apply in normal circumstances.

In day to day work when reviewing CY (existing cases where deductions are already present in respect of non-PAYE income) and CY+1 you must (where the individual or their agent has specifically agreed) include deductions up to £10,000 to cover the non-PAYE income but you must first ensure that

  • All PAYE income has already been taken into consideration. This includes benefits in kind, small sources of PAYE income and deductions such as Adjustment to Tax Rate Bands
  • Any underpayments for earlier years have already been included
  • The 50 per cent K code limit is not exceeded

Note: From 6 April 2015 the Regulatory limit ensuring employees have no more than 50% of their pay deducted has been extended to all tax codes including tax codes with prefix S.

The Scottish Rate of Income Tax introduced from 6 April 2016 will apply to an individual who is a resident in the United Kingdom (UK) for tax purposes and who has their sole or main place of residence in Scotland for more of the tax year than in another part of the UK.

The Scottish rate of tax only applies to non-savings and non-dividend income. Savings and dividend income is taxed at the savings and dividend rates. Further information is given at PAYE100035

Whether any non-PAYE income can be included in a code depends on an individual’s circumstances. Where you have an individual who is in receipt of non-PAYE income action guide tax40002 can be used to decide what deductions can be included.

The deductions can be adjustments such as Higher Rate Adjustment or deductions based on the actual income such as Untaxed Interest. There is no limit to the amount of each deduction, no preferential order and no limit to the number of deductions that can be included.

The remainder of this subject is presented as follows

Examples of deductions and adjustments you can include in a tax code
New sources of non-PAYE income advised by telephone (to offices with voice recording facilities)
New sources of non-PAYE income advised in writing
SA cases and non-PAYE income already in code
SA cases and no deduction in the CY code for non-PAYE income

Examples of deductions and adjustments you can include in a tax code

Untaxed interest (interest without tax taken off - gross interest). Note: The untaxed interest calculation has been enhanced, see below for further guidance
 
Taxed investment income
Income from property
Foreign dividend (under £300 gross) in PAYE only cases (cases not linked to an SA record where no SA return is expected)
Other income that does not arise from a trade, profession or vocation

Personal Savings Allowance

The Personal Savings Allowance (PSA) introduced tax-free income from Savings Interest from 6 April 2016. This applies up to a maximum £1000 for Basic Rate customers and £500 for Higher Rate customers. The PSA does not apply to savings income received by Additional Rate customers.

With the introduction of PSA from April 2016, the system for deducting tax at source from savings income ended, though banks and building societies continue to provide HMRC with details of gross untaxed savings income. HMRC makes provision for those taxpayers who continue to be liable for tax on savings income, adjusting tax codes for PAYE customers including PAYE-SA customers choosing to pay this way.

To establish the amount of PSA due against the Untaxed Interest element the Starter Savings Rate (SSR) for savers is applied before PSA is calculated.

Untaxed interest

From 15 December 2010, the PAYE Service untaxed interest calculation has been enhanced and now adds into the coding adjustment the amount of untaxed interest that is covered by allowances.

From 6 April 2016, a further change in the calculation has been made to include in the coding adjustment the amount of untaxed interest covered by the Starter Savings Rate (SSR) and Personal Savings Allowance (PSA).

An example of the new untaxed interest calculation is shown below.

Example

  • A customer advises that they are in receipt of untaxed interest of £5,600
  • The customers PAYE Service record shows personal allowance £11,000 and estimated pay at the primary source as £13,256
  • The PAYE Service calculates the untaxed interest coding deduction as 914L, calculated as

    • PA 11000
    • PA 13256 - PA 11000 = 2256 at Basic Rate
    • SSR covers 2744 of interest up to 16000
    • Then PSA 1000 applies to next 1000 of Untaxed Interest
    • Untaxed interest 5600 - SSR 2744 and PSA 1000 =1856
  • Therefore, the new primary source tax code will show

    • PA 11000
    • Less Untaxed interest 1856
    • Leaves net coding allowance 9144
    • Tax code = 914L

SSR applies to £2744 of Gross Untaxed Interest, up to £16,000 limit. Then £1,000 PSA applies to remaining Gross Untaxed Interest.

For the tax year 2016-17 only, PSA is shown in the Tax Code details as an allowance, but for
tax year 2017-18 onwards, PSA is used to reduce the amount of Untaxed Interest, applying
tax to interest remaining after any allowances. Displayed in P2 coding as an allowance for
2016-17 only, PSA will not show in the P2 coding notice for 2017-18 onwards.

Note: Savings and dividend income is taxed at the same rates for all taxpayers regardless of the individual’s residency status.

Income from property

From 1995-96 onwards, there is no distinction between Furnished Lettings and Income from Property. Both are assessable by reference to the CY income.

Both furnished lettings and income from property will be described on coding notices as Property income.

Where the individual has income from both furnished and unfurnished sources, code out one global figure as income from property.

Where an individual completes a self assessment tax return, unless the income has previously been included in the code and box 23.1A / TR5 box 3 is not ticked or you are requested to do so by the individual or their agent, do not attempt to code out income from

  • A self employed source
  • The Trust pages

Any non-PAYE income not included in the tax code must be entered in income, allowances, benefits and deductions (IABD) (PAYE130035) Non Coded income. Including income in the Non Coded income will ensure that this is taken into account in the total income calculation.

Dividend Tax

From 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
  • 38.1% for dividends taxed in the Additional Rate

An allowance will be introduced so that everyone can receive up to £5,000 of Dividend income, on top of any dividends received on shares held in an ISA.  If an individual earns less than £5,000 of Dividend they will not pay any tax.

With the introduction of Dividend Tax from April 2016, HMRC will make provision for those taxpayers who continue to be liable for tax on Dividend income, adjustting tax codes for PAYE customers including PAYE-SA customers choosing to pay this way.

Foreign dividend income

Where the foreign dividend income received is less than £300 gross per tax year, the foreign dividend income should be included in the PAYE end of year reconciliation. Include the amount of gross foreign dividend income less than £300 in IABD, see PAYE130055. Basic rate individuals are treated differently to higher rate and additional rate individuals. In higher rate and additional rate cases, the PAYE Service will calculate the ‘other income’ (not earned) coding deduction.

If the gross foreign dividend is £300 or more, then an SA record should be set up as this falls within the SA criteria.

Where the foreign dividend received is £300 or more gross per tax year, the individual must complete a foreign page for the SA return. Include the £300 or more foreign dividend in the Non Coded income field in IABD (PAYE130035).

Note: For PAYE / SA cases, foreign income should no longer be included in the individual’s tax code. You should remove any coding deductions for foreign income, even if the latest SA return reflects that the individual is content to have non-PAYE income coded out. In exceptional circumstances only you should follow the coding guidance at PAYE130055.

There may be occasions where an individual does not meet the SA criteria but because of their individual circumstances, we are unable to include some or all of their non-PAYE income in the code. In such cases the individuals must remain within or be set up in SA.

Note: Savings and dividend income is taxed at the same rates for all taxpayers regardless of the taxpayers residency status.

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New sources of non-PAYE income advised by telephone (to offices with voice recording facilities)

There is no limit to the amount of non-PAYE income that Contact Centre staff can accept. Offices where voice recording facilities are unavailable should continue to ask individuals to make a written request for non-PAYE income in excess of £2,500 to be coded.

Individuals already within SA

For individuals already within SA you should remind them of the option they selected at box 23.1A / TR5 box 3. Where they have not ticked that box, you should advise that you will code out the new source for CY, together with any existing coded amount, and subject to the limit of £2,500.

In any case where an SA individual tells you that they do not wish to have additional tax on the new (or existing) source of non-PAYE income collected through their code you should

  • Make an SA note confirming this, for example ‘T/p rang –/–/– and does not want non-PAYE income coded out for the year –/–‘
  • Remove the restriction from the tax code

Individuals outside of SA at the time of notification

Where a written request is not required the CY and CY+1 codes may be amended to include an appropriate deduction and a prominent note in Contact History where

  • The level of income is known
    And
  • The individual or their agent specifically agrees to inclusion of non-PAYE income in their code

If the individual or agent does not want the non-PAYE income coded then set up an SA record and where appropriate issue returns for previous years from the date the income first arose (also issuing the SA250 entry letter).

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New sources of non-PAYE income advised in writing

There will be occasions where the individual contacts you in writing to advise a new source of non-PAYE income.

Individual already within SA

You should act in accordance with the election made on the SA return for the previous year.

Individual outside of SA at the time of notification

When you are notified in writing of a new source of non-PAYE income with no specific request as to how tax should be paid, the action to take will depend upon the amount involved as follows.

Where the amount is not known

  • Write to the individual or agent and request an estimate of the amount
  • Ask the individual or agent if they want the non-PAYE income included in their code if the estimated amount is less than £2,500

If the individual or agent confirms that the non-PAYE income can be included in the tax code amend the CY and CY+1 tax codes.

Where the amount notified is a coding deduction of £2,499 or less

  • Amend the CY and CY+1 tax code to include the appropriate deduction
  • Make a note in Contact History
  • There is no separate notification to send to the individual

Note: If the customer or agent does not want the non-PAYE income included in the code they will need to object to the coding notice and complete an SA tax return.

Where the amount notified is a coding deduction of £2,500 or more

  • Do not adjust the code for CY and CY+1
  • Set up an SA record (unless the taxpayer is clearly NNL) and where appropriate issue tax returns for previous years from the date income first arose (also issuing the SA250 entry letter)

Note: Where the coding deduction is a Higher Rate Adjustment (HRA) in relation to taxable investment income, do not set up an SA record unless the gross taxable investment income is £10,000 or more or the HRA exceeds 5625, see SAM100060.

  • On receipt of the tax returns take the appropriate action in accordance with the entry at box 23.1A / TR5 box 3 when the first SA return is captured

Where the amount notified is a coding deduction of £2,500 or more and there is no liability to tax

  • Adjust the code for CY and CY+1
  • Make a note in Contact History

Where the amount notified is a coding deduction over £10,000

There may be occasions where an individual’s rate of pay, allowances and reliefs mean that a coding deduction in excess of £10,000 can still be accommodated. In these circumstances and as long as the individual or their agent has specifically requested that non-PAYE income in excess of £10,000 is to be included (such situations will be rare), the limit can be ignored. A prominent note in Contact History should be made in these cases to support quality initiatives and also make an SA note confirming the position.

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. Once an objection has been received a note in Contact History should be made and no attempt should be made to code out the income in future years.

Where the individual’s non-PAYE income is below the SA limit, and they do not meet any of the other criteria for SA, it is worth advising them that if they continue to have the non-PAYE income included in their code, they will not have to complete an SA return provided their circumstances remain unchanged.

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SA cases and non-PAYE income already in code

Where you have an SA case and non-PAYE income is already in the CY code you must

  • Update the CY and CY+1 code based on information in the CY-1 return including any new sources of income, taking into account

    • The 50 per cent K code limit
      And
    • The £10,000 limit

(See action guide tax40002 for further guidance on calculating the 50 per cent K code and £10,000 limit)

Individuals who already have non-PAYE income included in their code will already be aware of our ability to include this type of income in their code.

If box 23.1A / TR5 box 3 on the self assessment tax return is ticked then you must not code out any non-PAYE income and you must remove any non-PAYE income from the CY and CY+1 codes. You must also set the Inhibit Auto Closure signal on SA.

When updating IABD and non coded income you should take the following actions

  • Update all the IABD fields that make up non coded income which are

    • Taxed Investment income
    • Untaxed interest
    • Income from property

Note: For PAYE / SA cases, foreign income should no longer be included in the individual’s tax code. You should remove any coding deductions for foreign income, even if the latest SA return reflects that the individual is content to have non-PAYE income coded out.

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SA cases and no deduction in the CY code for non-PAYE income

Where you have an SA case and there is a new source of non-PAYE income for which there is not already a deduction in the CY code and box 23.1A / TR5 box 3 is not ticked, you must

  • Include the income in the code for CY and CY+1 taking into account

    • The 50 per cent K code limit
      And
    • The £10,000 limit

See action guide tax40002 for further guidance on calculating the 50 per cent K code and £10,000 limit.

A prominent note in Contact History should be made in these cases to support quality initiatives and also make an SA note confirming the position.

Note: For PAYE / SA cases, foreign income should no longer be included in the individual’s tax code. You should remove any coding deductions for foreign income, even if the latest SA return reflects that the individual is content to have non-PAYE income coded out.