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HMRC internal manual

PAYE Manual

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Coding: coding: general principles: S810 and S811 ITA 2007 (formerly S128 FA 1995) cases

This subject is presented as follows

Background

Section 810 ITA 2007 legislation can only be applied when the individual was non resident in the UK for the whole of the tax year. This legislation does not apply in the tax year of arrival in the UK or departure from the UK.

A non resident is generally liable to UK tax on all of their UK income but under Section 811 ITA 2007

  • Limits the amount of UK tax they pay on certain types of UK income (referred to as ‘disregarded income’)
  • Removes their personal allowances (PA)

Disregarded income (see Section 813 ITA 2007)

The following types of UK income are disregarded income

  • State retirement pension
  • Widows pension
  • Bank / building society interest
  • UK dividend income
  • National savings income
  • Purchased life annuities
  • Unit trust income

S128 indicator

The S128 indicator must be set on the record when it is more beneficial to the individual to claim under S811 ITA 2007.

Note: This indicator cannot be set automatically, you must manually set this indicator in all relevant cases.

Coding

If all the disregarded income is less than the individuals PA then a claim under S811 ITA 2007 would not be beneficial and the tax code should be calculated as normal.

If all the disregarded income is more than the individuals PA then a claim under S811 ITA 2007 will ‘potentially’ be more beneficial. Other cases may include where the primary tax code is a ‘K’ code or the current primary tax code has a higher rate adjustment (HRA) included.

Non SA cases - coding

For a non SA case you need to prepare 2 separate tax code calculations to find out if a S811 ITA 2007 claim is more beneficial

  • The first coding calculation should include all UK income and PA
  • The second coding calculation should omit the PA and all the pay sources of disregarded income (see above) but include the tax deducted / credited to this disregarded income

Note: The calculations will use the UK Income Tax rates because the individual was a non-resident in the UK, therefore not liable to pay tax at the Scottish rates.

Further information about the Scottish rate of Income Tax is given at PAYE100035

If a S811 ITA 2007 claim is more beneficial you should

  • Issue tax code 0T for CY and CY+1 to the primary source
  • Write to the individual explaining why the tax code has changed
  • Set the S128 indicator
  • Set the ‘inhibit automatic reconciliation’ for the tax year(s) in which S811 ITA 2007 is being allowed
  • Make a Contact History note of the actions taken and retain a copy of the 2 coding calculations in the DR

Note: Ensure that the tax year the S811 ITA 2007 is being allowed for is on the Contact History note.

If a S811 ITA 2007 claim is not more beneficial you should

  • Review the CY and CY+1 tax codes as normal
  • Make a Contact History note of the actions taken and retain a copy of the 2 coding calculations in the DR

Note: Ensure that the tax year the S811 ITA 2007 is not being allowed for is on the Contact History note.

SA cases - coding

When an SA tax return is captured the SA system automatically does 2 tax calculations and where necessary it will apply the tax calculation which is the more beneficial to the individual. Before you trigger a new tax code, you should review the latest captured SA tax return and if the SA tax calculation includes all the UK income and PA, you should review the tax code as normal.

Where the SA tax calculation has omitted the disregarded income and you are satisfied that the individuals circumstances have not changed, you can assume that the claim under S811 ITA 2007 is more beneficial to the individual. In these cases you should

  • Set the S128 indicator
  • Issue tax code 0T for CY, making sure to issue the tax code on a week 1 / month 1 basis if required

PAYE source exempt under DTA

Where all PAYE sources of income, other than the state retirement pension or other disregarded income, have been granted exemption under UK tax under the terms of a double taxation agreement, and S811 applies to the disregarded income, code NT should be operated against the exempt sources.

Where the state retirement pension, or other disregarded income remains taxable and S811 applies, code 0T should be operated against the primary source.

Annual coding

Where the S128 indicator is set on a record, the tax code which is most beneficial to the individual should be issued, under the S811 ITA 2007 rules.

If the S128 indicator is set and the tax code calculation results in a ‘minus’ figure of net coded allowances, (that is where the coding deductions are more than the allowances) a ‘K’ code should not be issued; code 0T should be the lowest tax code issued in these circumstances.

Note: To ensure code 0T is not replaced incorrectly with a ‘K’ code when a revised tax code is automatically calculated, the manual correspondence indicator must also be set on the record, with a suitable note added. Guidance on reconciliation for these cases is at PAYE93066.