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HMRC internal manual

PAYE Manual

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HM Revenue & Customs
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PAYE service income, allowances, benefits and deductions: IABD: investment income

Before entering any amount of investment income which is non-PAYE income which is to be included in the tax code you must first follow the guidance at PAYE12060.

Note: From 6 April 2016 the Scottish rate of income tax only applies to non-savings and non-dividend income. All savings and dividend income is still taxed using the UK tax rates.

Further information is given at PAYE100035

For PAYE only cases, investment income should be entered on this screen.

For PAYE / SA cases, investment income should only be entered on this screen if the latest SA return reflects that the individual is content to have non-PAYE income coded out.

If the individual does not want non-PAYE income to be coded out then the total gross investment income should be included as part of the Non Coded income on the Earnings screen.

The amount will be used by the system when calculating the total income calculation for coding purposes only. It will not be taken into account in the end of year reconciliation as all these cases should be SA Cases.

The table shows the type of investment income and whether

  • The amount is carried forward to be coded in CY+1
Item Carried Forward
   
Bank / Building Society Interest YES
UK Dividend YES
Unit Trust YES
Stock Dividend YES
National Savings YES
Savings Bond YES
Purchased Life Annuities YES
Untaxed Interest YES
Chargeable Event gain NO
Higher Rate Adjustment Recalculated at annual coding

 

The Investment screen displays the current amount which is view only.

 

Note: You should ensure you review and make any updates to the Details screen before completing the New Amount field. To display this screen select the Edit Record icon at the right hand side.

You should always enter

  • The gross / net amount as appropriate in whole pounds
  • The tax deducted in pounds and pence

The Details screen will display

  • The investment type
  • The gross amount from the Investment screen
  • The tax deducted amount
  • The net amount
  • Number of year for chargeable event

You must ensure you remove all previous entries including any zero amounts before entering any updates to ensure the correct amounts are used for coding and End of Year Reconciliation.

Bank / Building Society Interest, UK Dividends, Stock Dividends and Purchased Life Annuities

You should ensure you always enter the ‘actual’ amounts declared for the year concerned

  • Gross amount
  • Net amount
  • Tax deducted

Note: Do not use the [Calculate] button in cases where you hold the full bank / building society details as this may calculate the incorrect amount of tax. This will ensure that the correct amounts are included in the end of year reconciliation.

Note: From April 2016 Banks and Building Societies will no longer deduct tax from interest at source. This income should be recorded as Untaxed Interest to ensure the income is taken into account for Personal Savings Allowance.

Note: From April 2016, where Purchased Life Annuity interest has been paid without deduction of tax at source, this should be entered as Untaxed Interest to ensure the income is taken into account for Personal Savings Allowance.

Calculate Option

The [Calculate] button will allow you to

  • Calculate the net amount and tax deducted

Or

  • Calculate the gross amount and tax deducted

This option is only available when entering income for bank / building society interest or UK dividends when the net or gross amounts only have been declared (many HMRC forms now only ask the customer for the net figure). In these cases you should

  • Enter the net / gross as declared
  • Select the [Calculate] button

This will calculate the gross and net amount and tax deducted which will be included in the end of year reconciliation.

No liability cases

When you receive a repayment claim and tax has been deducted on the full amount of investment income and it is clear there is no overall net liability to tax, you must round the amount of relevant taxed investment income up to the next pound to ensure the tax repaid includes the full tax credit. For example

  • Taxed investment income of £1,000.40 should be recorded as £1,001

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

Taxed investment income should only be updated with actual amounts for the year of claim only.

Updating CY and CY+1 IABD

For cases where no further liability is expected, do not enter details of taxed investment income in taxed investment income fields in IABD for CY or CY+1. This will ensure that a repayment for tax deducted is not incorrectly issued following the tax year end.

To ensure the Adjusted Net Income is correct for CY and CY+1 enter gross investment income from the year the claim is concerned with in the Non-Coded Income field. Enter the Contact History note ‘YY/YY gross taxed investment income recorded in YY/YY IABD as Non-Coded Income’.

Note: Where there is likely to be a repayment due on taxed investment income for the current tax year, follow the guidance on Action guide tax40029 to ensure that form R40 is issued at the year end.

Gross / tax deducted does not agree

For cases where it is evident that the individual has registered / de-registered part way through the year to receive gross interest and the full amount of tax has not been deducted, the income should be split between untaxed interest and taxed interest in IABD, for example

Gross bank / building society interest £120

Tax credit £18.20

You should

  • Gross up the tax credit £18.20 x 100 / 20 = £91
  • Enter as gross bank / building society interest £91
  • Select [Calculate] - this will give £18.20 tax credit
  • Enter untaxed interest £120 minus £91 = £29
  • Enter a Contact History note in ’Other’ - ‘Interest paid gross is shown as untaxed interest’

Note: If the tax shown is more than 20 per cent of the gross figure only enter the amount of tax that is appropriate to the gross figure and advise the customer of the action you have taken.

Unit Trusts

Authorised Unit Trusts can be paid as taxed interest or dividend income. An individual’s income from an Authorised Unit Trust will either be paid as all interest or all dividend. An individual can not receive both interest and dividend income from the same Authorised Unit Trust.

Note: An individual can have more than one Authorised Unit Trust, however each Authorised Unit Trust may pay out either taxed interest or taxed dividend.

The tax voucher at the tax year end will make it clear whether the income is interest or dividend. You should complete IABD as follows

  • Authorised Unit Trust (interest income)

    • Enter as Bank / Building Society Interest (gross / tax deducted and net amounts). Where interest has been paid without deduction of tax at source (after April 2016), this should be entered as Untaxed Interest
  • Authorised Unit Trust (dividend income)

    • Enter as UK Dividend (gross / tax deducted and net amounts)

Do not use the [Calculate] button as this may calculate the incorrect amount of tax. This will ensure the correct amounts are included in the end of year reconciliation.

For further information regarding Authorised Unit Trusts please refer to SAIM2200.

Taxed National Savings / Savings Bonds

You should always ensure you enter the actual amounts declared for

  • Gross amount
  • Net amount
  • Tax Deducted

Note: This should be entered in the field for Bank / Building Society Interest.

Untaxed National Savings / Savings Bonds

You should always enter the

  • Gross amount
  • Net amount (enter the gross amount again)
  • Tax Credit / Tax Deducted (enter as 0.00)

Note: You should enter the gross amount in both the gross / net fields. This is to ensure the correct amount is used in the end of year calculation.

Untaxed Interest

You should always ensure you enter the

  • Gross amount

Note: If the individual has no net liability to tax and receives untaxed interest of over £2,500

  • Enter the amount of Untaxed Interest in IABD
  • Do not set up an SA record

Untaxed interest calculation

Up to and including 15 December 2010 the coding adjustment for untaxed interest only included the amount falling within the starting rate band (SRB) and it didn’t include the proportion of unused allowances allocated against untaxed interest. This resulted in customers with surplus allowances which could be used against untaxed interest having incorrect coding adjustments included in their tax code.

From 15 December 2010, the PAYE Service untaxed interest calculation has been enhanced and will now add into the coding adjustment the amount of untaxed interest that is covered by allowances. An example of the new untaxed interest calculation is shown below.

Example

  • A customer advises that they are in receipt of untaxed interest of £3,243
  • The customers PAYE Service record shows personal allowance 6475 and estimated pay at the primary source as £4,047
  • The PAYE Service calculates the untaxed interest coding deduction as 2835, calculated as

    • PA 6475
    • PA 6475 - estimated pay £4,047 = 2428 (available allowances)
    • Untaxed interest £3,243 - available allowances 2428 = 815 x 10 / 20 = 407
    • 407 + available allowances 2428 = untaxed interest deduction 2835
  • Therefore, the new primary source tax code will show

    • PA 6475
    • Untaxed interest 2835
    • Tax code = 364L

Chargeable Event Gains

You should always ensure you enter the

  • Gross amount
  • Number of Years for Chargeable Event

The amount will be used by the system when calculating the total income calculation for coding purposes but will not be coded, but will be used for end of year reconciliation purposes.

The number of years for the chargeable event will only be visible if you have selected Chargeable Event Gain from the Income screen.

If more than one chargeable event occurs in the same year, you should add them together and enter as one amount.

Where the customer is liable to tax at basic rate only, you should follow the guidance at PAYE93036, under sub heading ‘Chargeable Event Gain: effect on the Total Income figure’.

Where multiple chargeable events occur in the same tax year and the number of years for the chargeable events differs, you should follow the guidance at PAYE93036.

In exceptional circumstances where a chargeable event has occurred for the year of reconciliation, and due to the level of non savings income the savings starting rate is available to utilise against the event, guidance should be followed at PAYE93036.

For further information on savings and investment, see the Savings and Investment Manual (SAIM).

Important Notes

The following ‘Notes’ must always be considered when dealing with investment income cases.

  1. The tax year when COP records were migrated to the PAYE Service was 2009-10.

When entering any new figures for bank interest you must take this into account and complete the correct fields when you receive full income details. The system will

  • Calculate a revised HRA figure

 

  • Update the HRA field

 

  • Amend and issue a revised code
     
  1. You must not enter a figure in the HRA field as this is always updated automatically by the coding calculations on the system.