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HMRC internal manual

PAYE Manual

Coding: coding: general principles: introduction

A tax code reflects an individual’s allowances and deductions, liability to basic or higher rates of tax and can take into account any other sources of income the individual may have. The tax code is calculated on a provisional basis using the information known to us at the time the code is issued.

The tax code can change throughout the year depending on announcements made by the Chancellor in his Budgets or because of personal circumstances.

Most employees first get a code when they start work. The employer decides this code by following fixed rules. If the employee’s pay is above the limit for tax deduction, the employer should tell you. PAYE Service rules will then decide if the first code used by the employer is correct. Under certain circumstances when a primary employment record is created, an automatic tax code will be calculated and issued according to business rules, see PAYE63030. Where a secondary employment record is automatically created, the PAYE Service will also calculate any unused allowances and allocate them in the correct order, see PAYE11055. If a tax code is wrong, you will need to issue an amended code. You will also have to review codes at other times

  • In day to day work, when you know an employee’s circumstances have changed
  • At Annual / Budget Coding, to make any changes needed for the next year, including those arising from the Budget proposals
  • At the automatic state pension / benefits review

Each time you update an item in the coding, or review a code because of updated information about income you must always

  • Consider information already on the record that is not directly related to the correspondence for example P11D information and notes on Contact History
  • Consider the indicators
  • Consider the knock on effect to other items, for example when reducing or increasing estimated income, estimated pay, higher rate adjustment or other coding items that may be affected
  • Consider the basis of operation - should a week 1 / month 1 basis be applied if not calculated by the system, based on the information supplied by the customer, or the details we currently hold
  • Review the code(s) in operation at any secondary employment source(s)
  • Review the CY+1 code

Important note about cumulating tax codes

When there is a change of employment the system will not automatically restore non-cumulative codes (week 1 / month 1). Where there are large gaps of employment you must check for any previous pay and tax details and issue cumulative codes to include the previous pay and tax on the P6 issued to the employer. There is more information about gaps in employment at PAYE64025.

If the non-cumulative code (week 1 / month 1) is continuing ensure that the system displays the correct basis of operation.

Scottish rate of Income Tax

The Scottish Government is able to set their own rates of Income Tax from the 6 April 2016. Where the Scottish Rate of Income Tax applies it will include an ‘S’ Prefix to the tax code, for example, S1100L, SBR, S0T.

The ‘S’ prefix does not apply to Code NT cases. Code NT is used for both UK (England, Wales and Northern Ireland) and Scottish individuals.

Further information is given at PAYE100035