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HMRC internal manual

PAYE Manual

HM Revenue & Customs
, see all updates

Coding: coding: general principles: coding rules

This subject is presented as follows

Allowance restriction (HPAR)

The calculation of the allowance restriction (HPAR) will now be based on the individual’s total employment and / or occupational pension estimated pay and not just the individual’s ‘primary’ employment income.

To do this a comparison will be made of the net coding allowances (NCA) to the total employment / occupational pension estimated earnings income

  • Where the net coding allowances are greater than or equal to the total employment / occupational pension estimated earnings income, HPAR will be removed
  • Where the net coding allowances are less than the total employment / occupational pension estimated earnings income, standard HPAR coding rules will apply

Choosing figure for other income

When you have to deduct other income from allowances follow these rules

  • The correct figure is the amount you would include in an informal calculation or Self assessment for the coding year
  • For the next coding year you can use the same figure as you used for the current year. However, if you know this figure may be much different, use a better estimate


Cover by allowances, by deducting the amount from the allowance at the primary source, any of the following

  • Sources of earnings, for example small fees and tips
  • Casual profits
  • Interest
  • Property income
  • State pensions (this is taxed as PAYE income)

Do not code out income already taxed at source, such as dividends, bank or building society interest. However in higher rate cases for which a taxed income adjustment is needed you should refer to PAYE13075.

Where a deduction creates a K code, refer to PAYE11015 and PAYE11095.

If an individual objects to the coding out of non-PAYE income, remove the deduction from the code.


When you need to make an estimated coding entry

  • Use the coding charts to help you (these are usually issued with the Annual Coding and Budget Coding Business Guidance Notes)
  • Make a reasonable estimate, using any information that may help you, unless the individual provides you with a more accurate figure

How to allocate rates of tax

Try to arrange the items that are chargeable to tax in such a way that the individual suffers the lowest rate first.

In most cases we collect tax on income covered by PAYE before that collected in other ways. So, where you can, under PAYE

  • Give any allowances due in the code
  • Charge tax at the basic rate and higher rates, however, you should remember to
  • Code out any untaxed income as usual
  • Follow any order the individual prefers

Last operated tax code

Each time a tax code calculation is triggered the PAYE Service will make a decision about the new tax code, based on the last tax code operated by an employer / pension provider.

In all instances, the last operated tax code is defined as the last tax code calculated where the basis of operation is set to cumulative or week 1 / month 1.

When a primary source changes within a tax year, and a new tax code calculation is required, the last operated tax code will be the tax code calculated against the ceased primary source. The new primary source will have a start tax code and this is the tax code the new primary source will be operating. If the start tax code is not populated then the tax code from the ceased primary source will be used.

‘Not operated’ status tax codes

Each year at annual coding the PAYE Service will compare the new CY+1 tax code against the latest CY tax code operated. The PAYE Service will ignore any tax codes calculated with the ‘not operated’ status set and will go back to the latest CY tax code issued without the ‘not operated’ status.

For example, a tax code has been calculated CY on 1 January of 747L, the CY tax code was then amended to Code NT on 1 February but the ‘not operated’ status was set. At annual coding the PAYE Service would ignore the 1 February Code NT tax code calculation and base the CY+1 tax code on the 1 January 747L tax code calculation.

Note: You should take extra care when amending tax codes and only set the ‘not operated’ status when applicable, see PAYE11060 for further guidance.

Primary source and secondary source records

You must check that the tax coding for the primary source and any secondary source contains the correct allowances, the PAYE Service will calculate the tax codes based on the details entered. If you are satisfied that the tax codes are correct [Submit] the codes for issue.

‘Provisional’ coding items

You may occasionally need to give an allowance or relief on a provisional basis. If you do, be sure to make it clear by letter that it is only provisional.

This is because a P2 or letter is normally enough to determine an individual’s claim to an allowance or relief. It may be binding on HMRC, even if in the end the allowance or relief is not due.

This does not apply if it is only the amount of an allowance or relief that is in doubt, for example with an age-related allowance or relief for interest paid.

Rounding up figures

When rounding up amounts round any pence figure

  • In allowances, to the pound above
  • In deductions, to the pound below

Scottish rate of income tax

From 6 April 2016 the Scottish rate of Income Tax will apply where an individual is 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 taxpayer status applies for a whole tax year and it is not possible to be a Scottish taxpayer for part of a tax year.

The total rate for Scottish taxpayers is the amount of Income Tax Scottish taxpayers will pay on their non-savings and non-dividend income. Savings and dividend income is still taxed using the UK tax rates regardless of the individual’s status.

The tax code will include an S prefix to indicate they are liable at the Scottish income tax rates.

Further information is given at PAYE100035

Updating the PAYE code for a leaver

The code must be maintained and updated for CY leavers. There is no need to maintain the code for CY-1 or earlier leavers, see SPD 6a.16.

When is a secondary source record required?

Create a secondary employment source record (see also PAYE76155) and determine a code when

  • Secondary source earnings are more than the basic Personal allowance
  • You want the employer to deduct tax, this includes cases where the pay varies and coding it out is difficult