PAYE11050 - coding: codes: how they are used and calculated: rules for working out codes
This subject looks at rules to follow when dealing with all
coding work. There are many different types of case you will have
to deal with. Also covered are the allowances and deductions that
you may need to include when coding.
The remainder of this subject is presented as follows
Allowances
Choosing a figure for coding out other income
Deductions
Estimates
How to allocate rates of tax
Keep records up to date
List of Coding Charts
Main source office and sub-source office
responsibilities
‘Provisional’ coding items
Rounding up figures
Take care and act promptly
When is a sub-source record required?
Allowances
Give each taxpayer a coding allowance for all personal reliefs
he or she is due.
The COP system sends targeted review forms only in selected
cases. For others it assumes the current year coding allowances
should continue for the following year. If you know they should be
different change them using COP Function CD.
Choosing a figure for coding out other income
When you have to deduct other income from allowances follow these rules
- The correct figure is the amount that would be assessable 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
Deductions
Try to cover by allowances, by deducting the amount from the allowances at the main 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)
- HR adjustments for income taxed at source
However if an individual objects to the coding out of income not
chargeable to tax as employment income, remove the deduction from
the code.
Where a deduction creates a K code you should check that the
50 per cent limit is not exceeded. You can use the K Code checker
or Coding Assistant available through SEES to check the code.
Estimates
When you need to make an estimated coding entry
- Use the coding charts to help you
- Make a reasonable estimate, using any information that may help you, unless the taxpayer 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 taxpayer 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
- Code out any untaxed income as usual
Keep records up to date
You must keep the taxpayer's record up to date. Take special care to amend the record if you code a case manually. If you forget to update the record the computer may issue the wrong code during a batch process. This will mean extra work.
List of Coding Charts
Below is a list of charts and guides that are designed to help with coding
| P202 | Working out codes: entries on coding notices |
| P202(ESR) | Working out Excessive Starting Rate adjustment |
| P202(Helpcard) | Brief summary of changes for a year |
Main source office and sub-source office responsibilities
The main source office must see that the coding for the main
source and any sub-source contains the correct allowances.
For the main source the main source office should
- Work out the taxpayer's code
- Send the taxpayer a notice of coding
- Tell the employer the code to use
For the sub-source, the main source office should liaise with
the sub-source office to determine the code to be used.
The sub-source office can then send the taxpayer and the
employer details of the code that will apply.
‘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 on the P2 or
letter that it is only provisional.
This is because a P2 or letter is normally enough to
determine a taxpayer'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
Take care and act promptly
Coding is very important. If you take care when working out the
figures it will cut down the number of queries from taxpayers and
will also save work at the end of the year.
If a code needs to be changed and you have all the facts,
amend it without delay. The sooner you issue a new code the sooner
the taxpayer will have the correct tax deducted.
When is a sub-source record required?
Set up a sub-source record and contact the main source office for help in determining a code when
- Sub-source earnings are more than the basic Personal allowance
Or
- You want the employer to deduct tax. This includes cases where the pay varies and coding it out is difficult
