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 for the many different types of case you will have to deal with. This subject also covers the allowances and deductions that you may need to include when coding.
The remainder of this subject is presented as follows
Choosing a figure for coding out other income
Primary source and secondary source cases
When is a secondary employment source record required?
Allowances
Give each individual a coding allowance for all personal reliefs he or she is due.
The 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 in income, allowances, benefits and deductions.
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 primary 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)
- Higher rate adjustments for income taxed at source
However if an individual objects to the coding out of income not chargeable to tax as PAYE income, remove the deduction from the code.
The system will check where a deduction creates a K code that the 50 per cent limit is not exceeded. Tax deducted on any one day cannot exceed 50 per cent of the gross pay for that period. The employer will collect any shortfall on a later pay day if possible.
Estimates
When you need to make an estimated coding entry
- Make a reasonable estimate, using any information that may help you, unless the individual 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 individual 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 individual'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 system may issue the wrong code during an automatic 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
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P202 |
Working out codes: entries on coding notices |
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P202(Helpcard) |
Brief summary of changes for a year |
Primary source and secondary source cases
Check that the coding for the primary source and any secondary source contains the correct allowances.
For the primary source you should
- Fully complete income, allowances, benefits and deductions
- Trigger a tax code calculation
- Issue the individual a notice of coding
- Issue the code to the employer
For the secondary source, review the calculated code and issue as the appropriate code to the employer.
‘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 to the individual that it is only provisional.
This is because a P2 or letter is normally enough to determine an individual'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 individuals 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 individual will have the correct tax deducted.
When is a secondary employment source record required?
Create a secondary employment source (see also PAYE76155) and review the allowances in determining a code when
- Secondary 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
