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HMRC internal manual

PAYE Manual

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HM Revenue & Customs
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Coding: coding: general principles: annual coding

This subject is presented as follows

General

PAYE Business Guidance Notes (BGN) are issued each year to provide detailed instructions regarding Annual recoding. The BGN includes the dates of each review made by the system. Every record, except where the Deceased indicator is set, is reviewed by the system to determine the code for the next tax year (CY+1).

If the system cannot determine the code then work items will be generated. The work items will display information specified for that work item type. PAYE110000 gives you more information about the work management system and about the format of the work items.

Main Review

The main review is a process to allocate a code for CY+1. With the exception of deceased cases every individual’s record (including live secondary source and primary source leavers) will be reviewed. Where there is no live primary employment the system will review the CY+1 code based on the latest information held for the latest ceased primary employment. Where possible the appropriate allowances, deductions and adjustments for CY+1 determined and a tax code calculated. Where a tax code cannot be automatically calculated a work item will be generated and the work item must be worked as priority before the supplementary review takes place.

Note: The PAYE Service follows rules to calculate the CY+1 tax code based on the latest operated CY tax code, see PAYE13080 for further guidance.

The main review will take place over a number of days and may include the state pension / benefits and incapacity benefit uprating at the same time. Where the state pension / benefits and incapacity benefit uprating is not done at the same time then a code will not be entered if there is state pension / benefits or Incapacity Benefit present in the coding record. Tax codes not finalised by this review will be finalised either by the final review or by staff issuing the tax code during day to day work.

Where there is a change of tax code a notice of coding is issued to the individual.

If the only change is a Budget adjustment of personal reliefs, no coding notification is issued. Each live employer, Department for Work and Pensions (DWP) or DWP Office will be given authority on the lines of the P9X procedure to adjust certain suffix codes at the following 6 April.

Note: When there has been a scheme transfer a tax code will be issued to all secondary employments at the new PAYE reference.

State Pension / Benefits uprating

This process is carried out each year with the Annual Coding - Main Review or as a separate process after the main review.

Where state pension / benefits or employment and support allowance or incapacity benefit is included as a deduction in the individual’s CY+1 coding record, it updates the amount of state pension / benefits or employment and support allowance or incapacity benefit for CY+1 in accordance with the pension / benefit details on the DWP file. Where details are not available on the DWP file, the amount of state pension / benefits or employment and support allowance or incapacity benefit in the CY+1 coding record is uprated by an appropriate percentage agreed each year.

Where the CY tax code has multiple benefits only one will be carried forward to the CY tax code, see PAYE13055.

The review results in

  • Automatic update of the amount of state pension / benefits and employment and support allowance and incapacity benefit in the CY+1 coding record either in accordance with the pension details on the DWP file or by an appropriate percentage
  • Setting of the indicators Actual NIB, Actual ESA, Actual IB or Estimated NIB, Estimated ESA or Estimated IB on the CY+1 coding record depending on the method used to increase the amount of state pension / benefits or employment and support allowance or incapacity benefit
  • Work items where clerical action is required

SA cases at annual coding

Annual coding main review runs in January every year, before the SA filing date of 31 January and annual coding DWP review runs at the end of January (very early in February). For SA customers who file their tax return in January this can result in incorrect tax coding notices being issued as they are calculated based on estimated figures from CY-2.

Enhanced PAYE Service processing

During annual coding main and DWP uprating tax codes will be calculated and work items triggered using existing rules and processes. However, where no work item is required and the case is ‘live’ SA the following rules will now be automatically be applied

  • If an SA auto-coding update has been processed since the previous 6 April (06/04/CY)

    • The annual coding tax code calculation will calculate and issue the P2 / P9 as per the annual coding code issue rules. The code type shown will be ‘Annual Coding’ or ‘Annual Coding P9X’
  • If an SA auto-coding update has not been processed since the previous 6 April (06/04/CY)

    • A code type status of ‘incomplete’ will be set against the annual coding tax code calculation

Note: The code type status will remain as ‘incomplete’ until annual coding ‘final review’ when all remaining ‘incomplete’ tax codes will be fully calculated and issued. They will show a code type of ‘Annual Coding’ or ‘Annual Coding P9X’.

Final Review

The purpose of this review is to ensure that a CY+1 code is present for all employments in preparation for the Annual CY+1 code issue to employers, DWP and DWP offices. In most cases, other than where state pension / benefits or employment and support allowance or incapacity benefit is present in the coding, a code will already be present as a result of the main review or subsequent action.

When there is no CY+1 code, this review will attempt to calculate one and, if appropriate, issue a notice of coding to the individual, and if appropriate an agent. Where it is not possible to calculate a code, either the CY code will be carried forward or if there is no CY code present, the basic allowances only will be allocated in the case of primary records, or code BR in the case of secondary records. In cases where the SVR indicator is set for CY+1 any CY+1 code will include the S prefix.

Where coding is not possible, work items will be generated for clerical action.

Note: First primary or new secondary employments created between the start of annual coding final and the end of the tax year will have a CY+1 tax code automatically triggered.

SA cases

At annual coding ‘final review’ any remaining ‘incomplete’ tax codes will be fully calculated and issued as necessary.

Work Items

Work items will be generated and the work item description will indicate why the annual coding has not taken place. Work item ‘244 Automatic Coding update - manual code indicator set ‘will be generated for Manual Code cases where the system is automatically updating codes at annual coding. For work item 244 follow the guidance at PAYE13025.

The work items are

171 - Annual Coding - transferred allowance - Age 75 CY+1 Generated when Married Couple’s allowance transferred provisionally to the wife is shown for CY+1 and the individual or wife will become age 75 in CY+1 tax year. See action guide tax40093 WMI171
   
172 - Annual Coding - transferred allowance deleted from - Age 75 CY+1 Generated where the system identifies that Married Couple’s allowance transferred provisionally to the wife has been deleted from CY+1 from the husband’s tax code. The Action Guide has been replaced with action guide tax40094 WMI172 available on the Customer Operations Guidance Gateway
175 - Annual Coding - review married couples allowance Generated when there is a Married Couple’s allowance (and date of marriage or civil partnership is on or after 5 December 2005) present for CY+1 which is not equivalent to Married Couple’s allowance maximum or 100 per cent or 50 per cent of Married Couple’s allowance. The Action Guide is at PAYE13010
176 - Annual Coding -maintenance payments - review age of child Generated when maintenance payment is shown for CY+1 and a maintenance payment date is set for a child indicating that the child will be 21 or over on 5 April CY+1. See action guide tax40157 WMI176
181 - Annual Coding - manual correspondence to employer Generated when a new tax code has been calculated and the manual correspondence to employer indicator is set. The Action Guide has been replaced with action guide tax40083 WMI181 available on the Customer Operations Guidance Gateway
182 - Annual Coding - Code NT carried forward Generated when CY code of NT has been carried forward to CY+1 except where Residency CRT indicator is set. See action guide tax40199 WMI182
183 - Annual Coding - update NIB -IB shown Generated when the DWP file shows state pension / benefits to be updated but the individual’s record has incapacity benefit in the CY+1 tax code. The Action Guide is at PAYE13014
184 - Annual Coding - update IB - NIB shown Generated when the DWP file shows incapacity benefit to be updated but the individual’s record has state pension / benefits in the CY+1 tax code. The Action Guide is at PAYE13015
187 - Annual Coding - update NIB - primary EMPT live at (This content has been withheld because of exemptions in the Freedom of Information Act 2000) Generated when the DWP file shows state pension / benefits to be updated but the individual’s primary employment is live at (This content has been withheld because of exemptions in the Freedom of Information Act 2000) . The Action Guide is at PAYE13016
250 - Annual Coding - Transferred allowance reduced Generated where the system identifies that Married Couple’s allowance transferred provisionally to the wife has been reduced in CY+1 in the husband’s tax code See action guide tax40158 WMI250
401 - Annual Coding - update NIB -ESA shown Generated when the DWP file shows state pension / benefits to be updated but the individual’s record has employment and support allowance in the CY+1 tax code. The Action Guide is at PAYE13018
402 - Annual Coding - update ESA - NIB shown Generated when the DWP file shows employment and support allowance to be updated but the individual’s record has state pension / benefits in the CY+1 tax code. The Action Guide is at PAYE13019
403 - Annual Coding - update NIB - primary EMPT live at (This content has been withheld because of exemptions in the Freedom of Information Act 2000) Generated when the DWP file shows state pension / benefits to be updated but the individual’s primary employment is live at (This content has been withheld because of exemptions in the Freedom of Information Act 2000) . The Action Guide is at PAYE13020