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

P202Working 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