PAYE11005 - coding: codes: how they are used and calculated: introduction

A tax code reflects an individual's allowances and deductions, liability to lower or higher rates of tax and can also take into account any other sources of income he or she may have. Each code sets the level at which the employer must start to deduct tax from pay. In this way we can collect roughly the total tax due from the payments made in a year.

Tax is charged at different rates on bands of taxable income. Form P241 shows the rates and bands applicable for each year. Under the PAYE system it is the employer's responsibility to deduct tax from pay and other earnings at the time of payment. To deduct the correct amount of tax due at each rate, the employer needs a set of Tax Tables and a code for each employee.

You can use the computer to check or amend most codings. The computer will use the allowances, deductions and signals held on the taxpayer's record to work out the code. It can send a notice of the code to the taxpayer (form P2) and the employer (form P6).

The SEES Coding Assistant is mandatory and must be used in all cases.

Most employees first get a code when they start work. The employer decides this code by following fixed rules. If the employee's pay is above the limit for tax deduction, the employer should tell you. You must then decide if the first code used by the employer is correct. If the code is wrong you will need to issue an amended code. You will also have to review codes at other times

• In day to day work, when you know an employee's circumstances have changed
• At Annual / Budget Coding, to make any changes needed for the next year, including those arising from the Budget proposals
• At the automatic National Insurance benefit review

Each time you update an item in the coding, or review a code because of updated information about income you must always

• Consider information already on the record that is not directly related to the correspondence such as ECS Enotes
• Consider the knock on effect to other items, such as reducing / increasing age related allowances (ESTINC), ESTPAY, HPAR, BRR / ELR , HRA and so on
• Review the code(s) in operation at any sub-source(s)
• Review the CY+1 code