PAYE11090 - coding: codes: how they are used and calculated: ways an employer can apply a code


The employer can use some codes in more than one way. Sometimes the fixed rules issued to employers will tell them to apply the code in a certain way. On other occasions you may have to decide how the code should be applied. In these cases the employer will have to be notified.

Information is available on the following codes

Suffix codes and prefix K codes

Cumulative basis

Week 1 basis

Prefix D codes

Code BR

Code NT

JSA claimants

Suffix codes and prefix K codes

Employers can use suffix or prefix K codes in one of two ways

  • On a cumulative basis

Or

  • On a Week 1 or Month 1 basis

Cumulative basis

Codes are most often operated using the cumulative basis. The employer uses the Tax Tables and Free Pay tables to give a proportion of any allowances and bands of tax rates for the pay period. This works on a rolling basis up to each pay day.

The employer takes into account any previous pay and tax for the year. He or she deducts more or less tax, or makes a refund, as the rate of pay rises or falls. The cumulative basis means that the amount of tax deducted during the year will be roughly correct for most cases.

Week 1 basis

The Week 1 basis gives a proportion of any allowances and rates of tax for each pay period. However, it differs from the cumulative basis in that it ignores previous pay and tax. In effect all payments are taxed as though it was Week 1 or Month 1 of the tax year.

The aim of this basis is to prevent the employer making heavy deductions or giving any refund. You can tell employers to use any suffix or prefix K code on a Week 1 basis. However, the fixed rules we issue to employers tell them to operate the Week 1 basis automatically for some new employees, if certain conditions apply.

When an employer carries forward a current year code to the next year the instructions tell him or her to drop any Week 1 basis and to operate the code on a cumulative basis.

Prefix D codes

If you change a code to a prefix D code during the year, or if you tell a sub-source to do so, the computer will not calculate any potential underpayment. In these cases the taxpayer may be unaware an underpayment has arisen. You need to consider if you, or the sub-source office, should tell the taxpayer of this now, in advance of any end of year calculation.

Code BR

As a rule, BR is operated on the cumulative basis. However, if you reduce a code to BR you may have to tell the employer to use Week 1 basis. Also, no potential underpayment will be calculated or notified to the taxpayer, so you will have to consider if you wish to tell the taxpayer of this now, in advance of any end of year calculation.

Code NT

Code NT tells the employer not to deduct any tax. If you change a code to NT during the year the employer will not automatically refund any previous tax deducted. Remember, if the tax should be refunded, you will have to tell the employer to do so.

JSA claimants

The Department for Work and Pensions (DWP) / DWP Office works out the PAYE tax due

  • Only at 5 April or at the end of a benefit claim

And

  • Only if the code is cumulative

Whenever you amend the code of a JSA claimant you should use the cumulative basis. A DWP Office may need to change a cumulative code to Week 1 basis as follows

  • At the start of a claim where there are special features. These are listed at PAYE67000
  • At 5 April or at the end of a claim where the final figures show tax underpaid

When the DWP carries forward a code to the next year the instructions tell them to drop any Week 1 basis for all except occupational pensioners.