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PAYE Manual

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HM Revenue & Customs
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PAYE operation: targeted review forms: how to process form R40

This guidance provides an overview of the form R40 including instruction on each section of the review form.

For guidance on examining the form R40 see action guide tax40026

This guide is presented as follows

Identifying PAYE and claims R40s
Deceased
Processing R40
Purchased life annuities
UK interest and dividends
Trust, settlement and estate income
UK land and property
Foreign income
Any other income or benefits
Gift aid
Blind person’s allowance
Married couple’s allowance
Updating IABD for CY and CY+1
Claims made by or on behalf of minors
In-year R40 claims

Identifying PAYE and claims R40s

All claims cases can now be dealt with on NPS.

The following are described as ‘live’ employments on NPS (if there is no end date)

  • Employment
  • Occupational Pension
  • Incapacity Benefit (IB)
  • Jobseeker’s Allowance (JSA)
  • Employment Support Allowance (ESA)

Before dealing with the R40 you must check the following for ‘live’ employment sources

  • The employment and pension fields on the R40 form
  • Employment Summary
  • P14 Summary

Employment declared on R40 - no live employment on NPS

A customer may declare employment income on an R40 when there is no corresponding ‘live’ employment on NPS, in these cases you should consider the following for each year of the claim.

If the earnings are below the Class 1 NIC lower earnings rate (see the Customer Advisor Guide, ‘rates and tables’) and there is no PAYE employer, treat the case as if there were no employments.

If the earnings are above the Class 1 NIC lower earnings rate

  • Issue R40PAYE01 PAYE Income enquiry letter to the customer and file the R40 in DR
  • Update Contact History following action guide ‘Contact history notes’

Once we have received the R40PAYE01 PAYE Income enquiry letter, you must

  • Request starting information from the employer by issuing a P44 from OCA, see PAYE60001
  • Update Contact History following action guide ‘Contact history notes’

No employment declared on R40 - no live employment on NPS

For new customers, if the NINO is found following trace and match, reactivate the NPS record.

For new customers, when the NINO is not found following trace and match (including minors), a TRN will be allocated and an NPS record created. All previous years will be cleared ‘reconciled – no employments’. A new source type, R40, will allow you to input personal details from the R40.

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Deceased

An R40 may have been completed by the personal representative to claim a repayment to the date of death. There is no need to have an R27 completed as the personal representative will be contacted automatically if there is an underpayment or overpayment of tax.

Further guidance can be found at TSEM7204.

Processing R40

Select R40 from IABD landing and select the year of claim. A new template will open which mirrors the paper R40. Enter all the information on the R40 into the matching fields.

For in year claims with live employments ensure the estimated pay for each open employment is up to date.

IABD will pre-populate some fields. These fields can be edited. The information will flow to the appropriate fields in IABD.

When the form is submitted a contact history note will be created to show the form has beed logged and captured and the year it refers to.

An individual can make more than one claim in any year. Any subsequent claim is treated as an update to the previous claims.

WMI 229 will be created when a customer has

  1. No verified NINO (TRN cases), no live employment/pension and the repayment is £100 or more
    or
  2. Has a verified NINO, no live employment/pension and the repayment is more than £500.

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Purchased life annuities

Income from a purchased life annuity is investment income and should not be set up as an employment source on NPS. You may find that income from a purchased life annuity has been incorrectly entered as pension and retirement annuity income.

How to identify a purchased life annuity

A purchased life annuity which has been entered as pension income will not have a corresponding source on Employment Summary, and tax will have been deducted at the basic rate. If it is not clear whether the income relates to a purchased life annuity then you should contact the customer preferably by telephone for confirmation.

If you have determined that the income entered as pension and retirement annuity income on the R40 is from a purchased life annuity this should be treated as bank or building society interest. The tax should not be carried forward in cases where the customer has no liability to tax see PAYE130060.

Only the R40’s for CY-2 or earlier where there is no live NPS/SA record for the tax year relating to the R40 should be sent to the R40 Exceptions Team (previously known as National Claims Office).

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UK interest and dividends

From April 2016 banks and building societies no longer deduct tax from interest at source,  instead they will send untaxed interest figures and they will be populated from the TDSI data (Tax Deduction Scheme for Interest). This income populates the Untaxed interest field in NPS.

Some types of interest, for example interest from PPI compensation payments will still have tax deducted at 20% and the R40 process will need to be used.

Taxed bank and building society interest up to 5 April 2016

Before updating IABD with taxed bank or building society interest you must check the details given on the R40 - to ensure that the tax taken off matches the gross figure. If interest has tax deducted it will always be at one standard rate, known as the savings rate.

Although the tax deducted on interest is always 20%, the interest and tax declared on the R40 may not match. This might happen for a number of reasons, for example

  • The taxpayer has registered an account to receive gross interest part way through the tax year
  • The taxpayer has more than one bank account, some which have tax deducted and some which are registered to receive gross interest
  • The account is a joint account and the full amount of interest / tax has been entered

If the interest and tax details given on the R40 are correct you should enter the ‘actual’ amounts declared for the year relating to the R40 claim including those entered for interest received from a unit trust

  • Gross amount
  • Net amount
  • Tax credit / 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.

Gross figure and tax deducted do not match

Check whether the net figure is correct for the amount of the tax credit shown.

To check, add the net figure to the Tax credit and then multiply by 20%. If this gives you the amount of tax credit shown, then the net figure is correct.

Example

Gross bank / building society interest £80
Tax credit £18.20
Net £72.80

You should

  • Add the net £72.80 to the tax credit £18.20 = £91 (£91 x 20% = £18.20 tax credit)
  • Enter the details into IABD as follows

Gross £91 - Tax credit £18.20 - Net £72.80

  • Issue a letter to the customer explaining the calculation
  • Update Contact History with the actions taken

Note: If the net figure is incorrect you will need to follow the guidance below, depending on whether the tax deducted is more or less than 20% of the gross figure.

Net figure incorrect and tax deducted is less than expected based on the gross figure

The income will need to be split between taxed interest and untaxed interest in IABD.

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 the details into IABD as follows

Gross £91 - Tax credit £18.20 - Net £72.80 (Net figure £91 - £18.20 = £72.80)
Calculate untaxed interest figure £120 - £91 = £29, enter this into IABD - Investment Income - Untaxed Interest

  • Issue a letter to the customer explaining the calculation
  • Update Contact History with the actions taken

Net figure incorrect and tax deducted is more than expected based on the gross figure

Only refund the tax appropriate to the gross figure shown.

Example

Gross bank / building society interest £70
Tax credit £25
Net £60

You should

  • Amend the tax credit to 20% of the gross figure £70 x 20% = £14
  • Enter the details into IABD as follows

Gross £70 - Tax credit £14 - Net £56

  • Issue a letter to the customer explaining the calculation
  • Update Contact History with the actions taken

Personal Savings Allowance from 6 April 2016

The Personal Savings Allowance (PSA) introduces a new 0% rate band for Income Tax on income from Savings Interest from 6 April 2016. This will apply up to a maximum £1000 for Basic Rate customers and £500 for Higher Rate customers, which equates to £200 in tax. The PSA will not apply to savings income received by Additional Rate customers.

Note: PSA is in addition to the Starter Savings Rate which allows low income earners to receive up to £5,000 tax-free Savings Interest. Also, PSA is unaffected by the Scottish Rate of Income Tax and will be applied at the same rate for all taxpayers across the UK.

With the introduction of PSA from April 2016, the system for deducting tax at source from savings income will be stopped, though banks and building societies will continue to provide HMRC with details of gross untaxed savings income. Customers who continue to be liable for tax on savings income, will continue to have their tax codes adjusted accordingly.

These changes will mean fewer R40 claims for tax paid on savings income.

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Dividends up to 5 April 2016

All of the dividend figures given on the R40 are net figures. These should be entered into IABD in the; ‘UK Dividend’, or ‘Stock Dividend’ fields as appropriate. The net unit trust dividend income must be added to the net UK dividend income figure.

The net figure must be entered and the [Calculate] button used to complete the gross and tax deducted fields.

Dividend Allowance from 6 April 2016

From April 2016, the Dividend Tax Credit will be abolished and a new £5,000 Tax Free Allowance for Dividend income will be introduced.

The new rates of tax on Dividend income above the allowance will be –

  • 7.5% for dividends taxed in the Basic Rate
  • 32.5% for dividends taxed in the Higher Rate
  • 38.1% for dividends taxed in the Additional Rate

An allowance will be introduced so that everyone can receive up to £5,000 of Dividend income, on top of any dividends received on shares held in an ISA. If an individual earns less than £5,000 of Dividend they will not pay any tax on it.

Note: Dividend Tax reform is in addition to and outside of ISA allowances. Also, Dividend Tax is unaffected by the Scottish rate of income tax and will be applied at the same rate for all taxpayers across the UK.

With the introduction of Dividend Tax from April 2016, HMRC will make provision for those taxpayers who continue to be liable for tax on dividend income, adjusting tax codes for PAYE customers including PAYE-SA customers choosing to pay this way.

These changes will mean fewer R40 claims for tax paid on dividend income.

SA criteria

From April 2016, a Self-Assessment tax return will be required if the customer is or was

  • self-employed
  • in receipt of £2,500 or more in untaxed income (but not including savings, investment or dividend income) for example from renting out a property
  • in receipt of savings or investment income, not including dividends, of £10,000 or more before tax
  • in receipt of dividend income of £10,000 or more before tax
  • making profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax
  • a company director - unless it was for a non-profit organisation, for example, a charity, and not in receipt of pay or benefits like a company car
  • in receipt of income (or their partner is) over £50,000 and one of them claimed Child Benefit
  • in receipt of income from abroad, living abroad and had a UK income
  • has income was over £100,000
  • is a trustee of a trust or registered pension scheme
  • had a P800 from HMRC saying they did not pay enough tax last year - and did not pay what they owed through the tax code or with a voluntary payment

Unless the taxpayer is clearly NNL, set the case up in Self Assessment (SA) (or reactivate any dormant SA record).

Update the SA record so that an SA tax return will be issued next April for CY.

Process the CY-1 claim on the PAYE Service following this guidance and that in action guide tax40026. Do not issue an SA return for CY-1 when the details have already been provided on the R40.

For full details of other SA criteria see SAM100050.

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Trust, settlement and estate income

Trust, settlement and estate income is taxed at a number of different rates. The rate at which it is taxed will determine where the income is entered in IABD.

The figures given on the R40 are the net figure and the tax deducted. The following guidance will explain how to calculate the gross figure and where to enter the details in IABD.

Trust, settlement and estate income - income taxed at trust rate

To calculate the gross figure you must add

  • Net amount taxed at Trust Rate - after tax taken off

    to
     

  • The tax paid or tax credit

Enter the figures into IABD in the ‘Trusts, Settlements and Estates Income at Trust Rate’ Details field.

Enter the gross figure in the amount field and the tax figure in the tax deducted field.

Trust, settlement and estate income - non-savings income taxed at basic rate

To calculate the gross figure you must add

  • Net amount of Non-Savings Income - after tax taken off

    to
     

  • The tax paid or tax credit

Enter the details into IABD in the ‘Trusts, Settlements and Estates Income at Basic Rate’ Details field.

Enter the gross figure in the amount field and the tax figure in the tax deducted field.

Trust, settlement and estate income - savings income

To calculate the gross figure you must add

  • Net amount of Savings Income - after tax taken off

    to
     

  • The tax paid or tax credit

Enter the details into IABD in the Investment Income screen, in the ‘Bank / Building Society Interest’ Details field.

Enter the gross figure in the gross amount field and the tax figure in the tax deducted field.

Trust, settlement and estate income - dividend income

To calculate the gross figure you must add

  • Net amount of Dividend Income - after tax taken off
    to
  • The tax paid or tax credit

Enter the details into IABD in the Investment Income screen, in the ‘UK Dividend’ field.

Enter the gross figure in the gross amount field and the tax figure in the tax deducted field.

Trust, settlement and estate income - income payments from settlor-interested trusts

The repayment cannot be completed on the PAYE Service. You should issue the repayment manually by following guidance within action guide tax40104

Trust, settlement and estate income - taxed at 22 %

To calculate the gross figure you must gross up the income taxed at 22 % - after tax taken off.

Example

£100 x 100 / 78 = £128.20 gross
£128.20 gross - £100 net = £28.20 tax deducted

Enter the details into IABD in the ‘Trusts, Settlements and Estates Income at Basic Rate’ Details field.

Enter the gross figure in the amount field and the tax figure in the tax deducted field.

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UK land and property

If the income figure shown on the R40 is more than £10,000, set up in SA (SAM100050).

If the profit figure shown on the R40 is £2,500 or more then set up in SA (SAM100050).

If the profit figure shown on the R40 is less than £2,500, you must enter the figure for profit into IABD in the Property Income, Profit Details field.

Before entering any profit into IABD, you must deduct any loss brought forward in IABD from the profit shown on the R40

  • If the loss is greater than the profit then you must enter 0 into profit and carry forward any remaining loss when updating CY+1
  • If the profit is more than the loss carried forward then you must enter the remaining profit within IABD

If there is a loss figure shown on the R40, you must enter the figure for loss into IABD in the Property Income, Loss Details field.

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Foreign income

Foreign dividend income

If the gross amount of foreign dividend income received is less than £300, the income should be included in IABD for CY-1. Where the income is entered into IABD will depend on the customer’s rate of liability.

If the gross amount of foreign dividend income received is more than £300 an SA record will need to be set up for the customer, and an SA return with a foreign income page issued for the year under review.

Basic rate and NNL customers

Where the gross foreign dividend income is less than £300 and the customer is liable to tax at the basic rate.

The figure given on the R40 will be the net amount, so you will need to calculate the gross amount by adding the net amount and the tax credit as foreign dividends will not always be taxed at 10%.

For CY-1 enter the details into IABD as Investment Income in the ‘UK Dividend’ Details field.

  • Add together the net foreign dividend and the foreign tax credit to arrive at the gross foreign dividend figure
  • Enter the gross foreign dividend in the net UK Dividend field

Notes:

1. If the fields are already populated with figures, remove them before entering the gross foreign dividend.
   
2. If the customer also has UK dividends, the figure of net UK dividends must be added to the gross foreign dividends before entering them in IABD.
  • You must use the [Calculate] button to populate the remaining fields and save

Higher rate customers

Where the gross foreign dividend income is less than £300 and the customer is liable to tax at the higher rates.

For CY-1 enter the details into IABD as Investment Income in the ‘UK Dividend’ Details field

  • Add together the net foreign dividend and the foreign tax credit to arrive at the gross foreign dividend figure
  • Enter the gross foreign dividend in the net UK Dividend field

Notes:

1. If the fields are already populated with figures, remove them before entering the gross foreign dividend.
   
2. If the customer also has UK dividends, the figure of net UK dividends must be added to the gross foreign dividends before entering them in IABD.
  • You must use the [Calculate] button to populate the fields and save
  • In the Foreign Income field, drill down on Foreign Pension and Other Income and enter ‘1’ in the Foreign Pension field. In the Foreign Tax Credit field enter the amount of the foreign tax paid and save
  • In Earnings enter ‘1’ in Job Expenses and save

Note: Where you find the P800 has gone onto a status of Pending, prepare a manual calculation for issue using the SEES R27 calculator. This calculator will give the correct figure of foreign tax credit and also provides a customer service note explaining how the credit is calculated.

All other foreign income

Any case identified with other types of foreign income not covered above, should be set up in SA. SA tax returns should be issued to the customer along with the foreign income supplementary page and help notes.

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Any other income or benefits

Chargeable event gains

You should always ensure you enter the

  • Gross amount
  • Number of years for Chargeable Event

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 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 CY-1, 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).

Other income and benefits

If the customer has declared a deferred state pension lump sum payment see PAYE94090.

If the customer has declared a ‘one off’ payment see PAYE130035.

For any other income types declared you will need to follow the relevant guidance. If the income does not fit into a specific category you should consider whether it can be included as ‘Other income (earned)’ or ‘Other income (not earned)’, see PAYE130035. You may also need to consider setting up an SA record, see SAM100060.

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Gift aid

Gift Aid is entered on the Allowances screen of IABD. Drill down to the ‘Gift Aid’ Details screen to enter the net amounts as follows

  • Gift Aid payments made in the year of claim. Before entering the figure in IABD you must deduct the total of any ‘one-off’ payments shown on the R40. This is carried forward to the following year
  • One-off Gift Aid payments - include the total of any ‘one-off’ payments made in the year of claim. This will not be carried forward
  • Gift Aid treated as paid in previous tax year - include the Gift Aid payments made in the year of claim but treated as if made in the preceding year. This will not be carried forward
  • Gift Aid treated as paid in current tax year - include the Gift Aid payments made after the end of the year of claim but to be treated as if made in that year. This will not be carried forward

For more information see PAYE10025.

If the net amount is not recorded this will result in the incorrect Coding Allowance and End of Year Reconciliation.

Note: If the customer has not paid any tax during the year in which Gift Aid payments are made then an underpayment will be created. In these circumstances you should write to the customer to inform them why they have underpaid and advise the action to take to avoid underpaying in future.

If a customer is NNL and claiming a refund of tax, the repayment will be reduced to account for the tax reclaimed by the charity on the Gift Aid payments made in the year of claim.

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Blind person’s allowance

If the customer has indicated on the R40 that they are registered blind you will need to check the Allowances screen of IABD to see if the Blind Person’s Allowance (BPA) has already been given

  • If BPA is already in IABD for the year of the claim then no further action is required
  • If BPA has not been claimed before you must check that the customer has given the date which they were first registered, and the name of the local authority, or other, register. If this information is not available you will need to contact the customer before updating NPS

For more information see PAYE130025.

Transferring unused blind person’s allowance

If the customer indicates that they would like to transfer unused BPA to their spouse or civil partner then you will need to issue a form 575T following guidance within action guide tax40218

Note: If, exceptionally, a 575T has already been completed and returned with the R40 you must follow the guidance in action guide tax40165

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Married couple’s allowance

To claim Married Couple’s Allowance (MCA) either the customer, or their spouse or civil partner, must have been born before 6 April 1935. If neither individual was born before this date then MCA is not due.

See PAYE130025 for further information.

Giving all or half of the minimum amount to spouse or civil partner

If the customer indicates that they have already asked to give all or half or the minimum amount of MCA to their spouse or civil partner they should have completed a Form 18 election before the start of the tax year.

If a Form 18 election is in place the ‘Elected Allowance Transfer’ fields of the Married Couple’s Allowance Details screen in IABD should already have been completed.

If the fields are not completed check Contact History and COP History for evidence that the Form 18 has previously been received.

If there is no evidence of a previous election, send a Form 18 to the customer with a covering letter to advise that

  • It is too late to make the election for CY-1
  • The Form 18 must be completed and returned before the start of the next tax year for the allowance to be transferred for CY+1

Transferring unused married couple’s allowance

If the customer indicates that they would like to transfer unused MCA to their spouse or civil partner then you will need to issue a form 575T following action guide tax40218

Note: If, exceptionally, a 575T has already been completed and returned with the R40 you must follow the guidance in action guide tax40165 

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Updating IABD for CY and CY+1

Use Form Type ‘Other Form’ to update IABD for CY and CY+1.

To ensure that taxed investment income is not incorrectly used to create a repayment when the year concerned becomes CY-1

  • Remove any taxed investment income from the taxed investment income fields in IABD for CY and CY+1
  • Do not include any new sources of taxed investment income in the taxed investment income fields

Update Contact History with a note of ‘R40 case, taxed investment income removed from / not included in YY/YY IABD’.

Note: If IABD contains non-coded income and there is the following Contact History note ‘YY/YY taxed investment income recorded in YY/YY IABD as Non-Coded Income’, review the note and the R40. Where IABD does not contain the figures from the most recent tax year for which we hold a claim, update IABD for CY and CY+1 then make a new note as above to show the latest position.

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Claims made by or on behalf of minors

If the customer is under 18 and lives in England, Wales or Northern Ireland the R40 will need to be signed by a parent or legal guardian.

If the customer is under 16 and lives in Scotland, the R40 will need to be signed by a parent or legal guardian.

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In-year R40 claims

In-year claims should be worked in line with the guidance in the R40 action guide, ie when there are no savings or investment income the R40 should be sent back to the customer with the relevant OCA letter OCA94, enclosing form P50.