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HMRC internal manual

PAYE Manual

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HM Revenue & Customs
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Coding: coding: general principles: estimated pay

An amount of estimated pay is required for every employment to enable the system to perform a coding calculation.  Estimated pay is usually based on the pay at the coded source and is used by the system in the calculation of underpayment restrictions and allowance restrictions.  When you are considering estimated pay, accept any estimates provided by the individual.

From 28 October 2015 the calculation of estimated pay has been enhanced and will use RTI information supplied on an FPS submitted by employers, to calculate a more accurate value.

Estimated pay will automatically be updated in IABD for FPSs which are received on or after 28/10/2015 and which have a ‘start date’ or a ‘leaving date’.

Note: Occupational pensions – Only ‘starter’ or ‘leaver’ FPSs received on or after 28/10/2015 in respect of an occupational pension which is paid annually (see pay frequency field on FPS) will have estimated pay calculated using RTI information.

‘Starter’ or ‘leaver’ FPSs received on or after 28/10/2015 in respect of an occupational pension which is not paid annually will have estimated pay calculated in accordance with the generic coding rules – see the section ‘Calculation of estimated pay prior to 28/10/2015’.

Estimated pay will also be updated shortly before annual coding, at a date set by HMRC – (known as the Bulk Estimated Pay Setting date).  A bulk update will be made to estimated pay for CY+1 for individuals with a live employment.  Note: All occupational pensions will be excluded from the Bulk Update.  At annual coding estimated pay for occupational pensions will be updated using the generic coding rules – see the section ‘Calculation of estimated pay prior to 28/10/2015’.

For all cases that do not fall into the rules detailed in the section ‘Calculation of estimated pay from 28/10/2015’, estimated pay will be calculated in accordance with the generic coding rules contained in the section ‘Calculation of estimated pay prior to 28/10/2015’.
 

If you have a recent return or other evidence such as the presence of a secondary employment source to suggest that the individual has other income, you may need to take this into account when arriving at the estimated pay figure. Do not issue a return or enquiry to check if there is other income unless you think this will have a material affect on the estimate.

The system will calculate an amount for CY+1 at the Bulk Estimated Pay Setting date prior to annual coding.  Consider if you need to enter a figure for both CY and CY+1.

You will need to enter a figure for estimated pay on the record if you come across cases where the system has been unable to calculate estimated pay.

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Calculation of estimated pay from 28/10/2015

Note: Estimated pay will not be updated using RTI information where:

  • Employment is non-matched or partially matched
  • Employment is P ceased
  • Employee is not paid annually and no FPS received in CY
  • FPS is received in respect of an Occupational Pension which is not paid annually and contains a start date and/or a leaving date

The system will not overwrite any CY+1 estimated pay figure already entered by an operator or a customer using the digital online service.

When calculating estimated pay for a leap year do not include the 29 February in your calculations.  Always use 28 days for February and 365 for a full tax year (see examples below).

The guidance below should be used in conjunction with the yearly annual coding Business Guidance Note (BGN).

Points at which Estimated Pay will be automatically updated

  • Estimated pay will automatically be updated in IABD for FPSs which are received on or after 28/10/2015 and which have a ‘start date’ or a ‘leaving date’.

Note: Occupational pensions – Only ‘starter’ or ‘leaver’ FPSs received on or after 28/10/2015 in respect of an occupational pension which is paid annually will have estimated pay calculated using RTI information.

Note: ‘Starter’ or ‘leaver’ FPS’s received on or after 28/10/2015 in respect of an occupational pension which is not paid annually will have estimated pay calculated in accordance with the generic coding rules – see the section ‘Calculation of estimated pay prior to 28/10/2015’.

  • Estimated pay will also be updated shortly before annual coding, at a date set by HMRC – (known as the Bulk Estimated Pay Setting date).  A bulk update will be made to estimated pay for CY+1 for individuals with a live employment.  Note: All occupational pensions will be excluded from the Bulk Update.  At annual coding, estimated pay for occupational pensions will be updated using the generic coding rules – see the section ‘Calculation of estimated pay prior to 28/10/2015’.

Starter FPS received on or after 28/10/2015

When an individual starts a new employment, the estimated pay for CY will be updated by apportioning information from their first FPS – see examples below

The steps below must be followed in the order they have been written for all calculations of estimated pay:

Step 1 – Is the ‘irregular employment indicator’ ticked on the FPS?

If yes follow the rules for ‘Paid irregularly (irregular employment ticked on FPS)’

If no go to step 2

Step 2 – Is the individual paid annually (see the pay frequency on FPS) and is it an occupational pension or an employment?

If yes follow the rules for ‘Paid annually (occupational pension or employment)’

If no go to step 3

Step 3 - If the case does not fall into the rules detailed at steps 1 and 2, apply the rules for ‘Regular payment’

For example, if the case has the ‘irregular employment indicator’ ticked on the FPS and the pay frequency is ‘annual’ and it is an occupational pension, apply the rules in Step 1 and follow ‘Paid irregularly (irregular employment indicator ticked on FPS).

The selection of ‘irregular employment indicator’ on the FPS identifies whether the case is treated as ‘irregularly paid’ not the pay frequency.

If the FPS has the ‘Irregular Employment Indicator’ ticked, the system will use default values of £15,000 for a primary employment and £5,000 for a secondary employment to calculate the estimated pay.  Where default values have been used to calculate the estimated pay, the ‘default estimated pay indicator’ will be set in the ‘Employment Estimated Earnings’ screen in IABD.

  • Individual is paid irregularly and the ‘taxable pay to date’ on the first FPS is greater than the current annual default estimated pay values

Update estimated pay for CY and CY+1 to the payment figure on the FPS

  • Individual is paid irregularly and the ‘taxable pay to date’ on the first FPS is not greater than the current annual default values

Set the default estimated pay indicator on the IABD record for CY and CY+1 and calculate estimated pay as follows:

  • CY – Pro-rata the annual default pay figure based on the length of time the individual has been in employment – (see example below)
  • CY+1 – Update CY+1 to the annual default amount

Example – CY

Primary employment

Taxable pay to date’ on first FPS £1000

Employment start date 01/11/2015

Number of days between employment start date (01/11/2015) and 05/04/2015 = 156 days

£15000 divided by 365 x 156 = £6410.9588 = £6410 (rounded down to the nearest whole pound)

 

CY+1

CY+1 will be updated to the full primary employment default value of £15000

If the individual is paid annually, is an occupational pension and the annual amount of the pension provided on the FPS is greater than £1.00

CY - update estimated pay for CY to the ‘taxable pay to date’ figure on the FPS

CY+1 - update estimated pay for CY+1 to the annual amount of the occupational pension

If the individual is paid annually, and is not an occupational pension, or is an occupational pension where the annual amount has not been provided or is equal to or less than £1.00

  • Update estimated pay for CY and CY+1 to the ‘taxable pay to date’ figure on the FPS.

Regular Payment

A regular payment is a payment that does not meet any of the criteria in the previous sections – ie ‘paid irregularly’, or ‘paid annually (occupational pension or employment)’

Estimated pay for CY is *apportioned *and calculated as follows:

  • ‘taxable pay to date’ figure provided on the first FPS, divided by the days between the employment start date and the date of payment on the first FPS, multiplied by the days between the employment start date and 05/04/CY (rounded down to the nearest whole pound)

Example

  • Taxable pay to date on first FPS £2000
  • Start date 01/11/2015
  • Payment date 30/11/2015
  • Days between employment start date and date of payment on first FPS, (01/11/2015 to 30/11/2015 = 30 days)
  • Days between employment start date and 05/04/CY = 156 days

£2000 divided by 30 x 156 = £10399.999 = £10399 (rounded down to the nearest whole pound)

If the employment start date is after ‘Bulk Estimated Pay Setting Date’ then estimated pay for CY+1 will also be updated as follows:

  • Estimated pay for CY+1 will be annualised and calculated using the ‘taxable pay to date’ provided on the first FPS divided by the days between the employment start date and the date of payment on the first FPS, multiplied by 365 (rounded down to the nearest whole pound)

Example

  • Taxable pay to date on first FPS £2000
  • Days between employment start date and date of payment on first FPS, (01/11/2015 to 30/11/2015 = 30 days)

£2000 divided by 30 x 365 = £24,333.333 = £24.333 (rounded down to nearest whole pound)

Cessation FPS received on or after 28/10/2015

When an individual ceases employment, the estimated pay for CY will be updated to the ‘taxable pay to date’ shown on the final FPS.

Estimated pay for CY+1will not be updated.

Bulk update of estimated pay in advance of annual coding

In advance of annual coding, at a date set by HMRC – (known as the Bulk Estimated Pay Setting date), a bulk update will be made to estimated pay for CY+1 for individuals with a live employment.  (occupational pensions will be excluded from the Bulk Update and at annual coding, will have their estimated pay calculated in accordance with the generic coding rules, see the section ‘Calculation of estimated pay prior to 28/10/2015’.

Estimated pay will be calculated by annualising the information from the last FPS received closest to the Bulk Estimated Pay Setting Date – see examples below:

Payment data not populated on FPS

If the payment data is not populated on the FPS, the individual is annually paid and either the customer or an operator has not provided a figure for estimated pay for CY+1:

  • Estimated pay for CY+1 will be updated with the P14 pay information from CY-1
  • If the payment data is not populated on the FPS and the individual is not paid annually, NPS will update the estimated pay using the rules detailed in the section ‘Calculation of estimated pay prior to 28/10/2015’

Payment data populated on FPS

If the payment is populated on the FPS, the employment is not ceased or P ceased and either the customer or an operator has not provided a figure for estimated pay for CY+1:

  • If the employment started in CY, calculate estimated pay for CY+1 as follows:

 

  • Divide the ‘taxable pay to date’ by the number of days between the employment start and the date of payment on the FPS and multiply by 365 (round down to the nearest pound)

Example

Employment start date 01/06/CY

Taxable pay to date on latest FPS before Bulk Estimated Pay Setting date £10,000 (Oct FPS)

Days between employment start date and date of payment on FPS = 153

£10,000 divided by 153 x 365 = £23,856.209 = £23,856 (rounded down to nearest whole pound)

  • If the employment started earlier than CY, the estimated pay for CY+1 calculate estimated pay as follows:

 

  • Divide the ‘taxable pay to date’ from the FPS closest to the Bulk Estimated Pay Setting Date, by the number of days between 06/04/CY and the date of payment on the FPS and multiply by 365 (round down to the nearest whole pound)

Example

Employment start date 01/03/CY-1

Taxable pay to date on latest FPS before Bulk Estimated Pay Setting date £20,000 (FPS 30 Oct CY)

Days between 06/04/CY and date of payment on FPS (30/10/2015) = 209

£20,000 divided by 209 x 365 = £34,928.22 = £34,928 (rounded down to nearest whole pound)

Calculation of estimated pay prior to 28/10/2015

How to review estimated pay

You will need to review the figure for estimated pay on the record if

  • NPS has assumed basic rate liability, see ‘System cannot calculate estimated pay’ below
  • It becomes apparent that the current estimated pay figure needs amending because, for example, the individual’s rate of pay has altered as a result of a change of job or retirement (however, in the majority of cases you will not know the revised rate of pay)
  • A code is amended in-year and a potential underpayment (PUP) is calculated
  • A calculation is issued to the individual that results in an underpayment that will later be collected through the code
  • The case is reviewed and there is more than one coded source

How to update estimated pay

Estimated pay should be updated by

  • Using the latest information provided by the individual or employer
  • Using evidence of previous earnings

Note: If you use P14 details or a final or month 12 FPS to calculate estimated pay and a start date is held in the year, you should work out the estimated pay as though it was received for the full year.

  • In occupational pension cases you should use the FPS occupational pension amount quoted under RTI Payment Annual Amount
  • Where no details are held assume that the individual will be liable at basic rate and use £15,000 as estimated pay for a primary employment and £5,000 for each secondary source where no pay details are held

System calculated estimated pay at annual coding

Note: NPS will not overwrite any CY+1 estimated pay figure already entered manually.

The guidance below should be used in conjunction with the yearly annual coding Business Guidance Note (BGN).

Where NPS is automatically updating tax codes, for example at annual coding, budget coding or SA autocoding, NPS automatically calculates the estimated pay figure for each live employment on an individual’s record in the following order

| 1. | The CY-1 P14 figure for that linked employment | || | 2. | If CY-1 P14 details are not available, the CY-2 P14 details for that linked employment | |   | Note: The P14 is not linked until it is viewable on the Employment Summary screen. | | 3. | Where the Employment Details screen holds a start date for the relevant employment which is after the beginning of the CY-1 (or CY-2 if the rules take the calculation that far back) the part year figure will be annualised | |   | The annualised amount is calculated as follows | |   | * The number of days from the start date held on the Employment Details screen to the end of the tax year
 
And then | |   | * Dividing the P14 pay by the number of days / weeks to which it relates
 
And then | |   | * Multiplying the weekly pay figure calculated by 52 week to calculate the estimated annual amount | |   | For example | |   | Employment started 28 October and the pay received is £2,500. There are 160 days from this start date to 5 April inclusive so NPS will calculate the estimated pay figure as follows | |   | 160 / 7 = 22.85 (rounded down to the nearest week (22 weeks) | |   | £2,500 / 22 X 52 = £5,909 | |   | Note: An end date will not be used when calculating the total number of days. Days will always be calculated from the start date to the end of the tax year. Where this has happened you should update the estimated pay if appropriate. | | 4. | If no estimated pay figure can be derived from a P14, but an estimated pay figure is set for CY against that employment, NPS will carry forward and uprate that figure by the pre-set percentage uplifts into CY+1 for that employment | | 5. | If NPS is still unable to derive an estimated pay figure from steps 1 to 4, then a default value of £15,000 will be used for the primary source and £5,000 for any secondary sources |

System calculated estimated pay for automatic tax code calculations

1. Where no estimated pay is held for the employment, NPS will refer to IABD for the previous primary employment held in CY
   
  Note: This can only occur for a primary employment.
2. Where there is no previous employment in CY, NPS will check for a linked P14 for the current employment in CY-1
3. Where there is no P14 held for CY-1, NPS will check for a linked P14 for the current employment in CY-2
4. If NPS is still unable to derive an estimated pay figure from steps 1 to 3, then use the following annual default values (15,000 for a primary source and £5000 for a secondary source) and pro-rata based on the length of time the individual has been in employment.

System cannot calculate estimated pay

If estimated pay is not present on the record for CY and no forms P14 are held, NPS will assume basic rate liability when calculating coding adjustments. You will be able to determine that this rule has been applied as follows

  • View the latest tax code for each employment on the Tax Code Details screen
  • The estimated pay figure will show ‘0’ and estimated tax ‘0.00’
  • View IABD Data from Tax Code Details screen
  • The employment estimated pay field will be blank

Where these cases are found you should update the estimated pay in accordance with ‘How to update estimated pay’ above.

Manually calculated estimated pay

There is no set percentage increase used to calculate a figure of estimated pay, except where the OCPN indicator is set on the employment record. You should consider the following points

  • Use any estimate provided by the individual
  • If no figure has been provided by the individual it may be helpful to review the rate of increase in P14 income for earlier years and use a similar rate to calculate the new figure for CY or CY+1
  • In occupational pension cases you should use the FPS occupational pension amount quoted under RTI Payment Annual Amount
  • For primary employments only, if the relevant employment started on or after 6 April in CY then consider using P14 details for CY-1 (or CY-2 if rules takes the calculation that far back) for the previous employment
  • For employments started on or after 6 April in CY consider using FPS details received in CY where at least three have been submitted and they are regular payments

Note: It is important that when estimated pay is reviewed in occupational pension cases, care is taken as some pensions are paid as a static amount and will not require an increase in the estimated amount. Please review earlier year P14 details and Contact History to check whether this is the case.

More than one coded source

Where there is more than one coded source of income, you may need to check that the estimated pay in use is calculating the correct amount of restriction. Where the individual is liable at the same rate at each source, it may not be necessary to change the estimated pay. However, where one or more of the following situations exist, a check should be made

  • The individual is not liable at the primary source
  • The primary source contains other earnings, (or pension)
  • The rate of tax payable at the secondary source is higher than the rate payable at the primary source
  • There are tax adjustments such as Adjustment to Tax Rate Bands restriction or savings income taxable at higher rate

First, make sure you need to maintain any secondary source record. If you need to maintain the secondary source(s)

  • Work out the estimated liability for the year
  • Calculate the allowance restriction needed to collect the correct amount of PAYE tax
  • Enter an appropriate figure of estimated pay to give you the allowance restriction you want

Use the following formula to calculate estimated pay where allowance restriction is present and there are tax adjustments in the coding

  • (Primary source pay minus Adjustment to Tax Rate Bands restriction or savings income taxable at higher rate) + (secondary source pay minus allowances allocated against other earnings, (or pension))

The system will automatically calculate the allowance restriction when you enter estimated pay, see SPD 6a.16 (PDF 65KB).