PAYE11096 - Coding: codes: how they are used and calculated: K codes (Action Guide)

When considering whether non-PAYE income can be included in a K code, follow steps 1 - 20 below. The guide is presented as follows

Initial action Steps 1 - 3
50 per cent K code rule reached or exceeded Steps 4 - 15
50 per cent K code rule not reached Steps 16 - 19
Final action Step 20

For details of how to use any of the PAYE Service functions, access the system help.

Initial action

1. Enter total allowances and reliefs due. If this is the first time that non-PAYE income has been included in the code, unless the individual has agreed that the CY code can be amended, only amend the CY+1 code. For SA individuals amend CY and CY+1 codes
2. Include in the code any deductions relevant to PAYE income, including
 
  • Benefits in Kind
 
  • State Pensions and State Benefits
 
  • Basic Rate Restriction and from 2011-12 Adjustment to tax rate bands
3. The system will identify if the 50 per cent K code limit has been reached or exceeded

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50 per cent K code rule reached or exceeded

  If the 50 per cent K code rule has been reached or exceeded
4. Calculate the maximum negative allowances to determine the reduction of non-PAYE income
5. Take the estimated pay at the primary employment (A)
6. Calculate the maximum tax that can be collected, this is half of the estimated pay (B) = (A) x 1/2
7. Is the basic rate band (for 2009-2010 this is £37,400) less than half the estimated pay (B)
 
  • No - go to steps 8 - 10
 
  • Yes - go to steps 11 - 14
8. Calculate (D) adjustment to collect result of (B)(D) = (B) divided by basic rate per centExample (A) = 10,000 (B) = 5,000(D) = (5,000 divided by 20 per cent) = 25,000
9. Calculated maximum negative allowance, (E) = (D) minus (A)Example (E) = 25,000 minus 10,000 = -15000The result is the maximum negative allowances
10. Reduce the non-PAYE deductions down until the K code calculated by the system represents the maximum negative allowances amount (E) at step 9. Any non-PAYE income removed from the tax code deductions should be added into the non-coded income field in the IABD earnings page (see PAYE130035)
  Note: Do not remove taxable employer benefits and / or taxable state pensions or benefits to reduce the K code.
11. From step 7 if the basic rate band is less than half the estimated pay (B) at step 6Calculate (F) adjustment to collect result of (B)(F) = (B) minus (basic rate band x basic rate per cent)Example half estimated pay (B) = 75,000Basic rate band for 2009 - 2010 is £37,400(F) = 75,000 minus (37,400 x 20 per cent) = 67,520
12. Calculate (G) adjustment to collect result of (F)(G) = (F) divided by higher rate per centExample (G) = 67520 divided by 40 per cent = 168,800
13. Calculate maximum negative allowances, (E) = basic rate band plus (G) minus (A)Example basic rate band for 2009-2010 37,400 plus 168,800 minus 150,000 = -56,200This result is the maximum negative allowances
14. Reduce the non-PAYE deductions down until the K code calculated by the system represents the maximum negative allowances amount (E) at step 13. Any non-PAYE income removed from the tax code deductions should be added into the non-coded income field in the IABD earnings page (see PAYE130035)
15. If there is an underpayment for earlier years and the 50 per cent rule is still exceeded on removing non-PAYE income, consider collection by another method

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50 per cent K code rule not reached

  If the 50 per cent K code rule has not been reached
16. Include any underpayments for earlier years
17. If the 50 per cent K code rule has now been reached or exceeded
 
  • Go to step 4 to calculate the reduction of non-PAYE income
 
  • Consider whether all or part of the underpayment needs to be collected by another method
18. If the 50 per cent K code rule has still not been reached or exceeded
 
  • Include non-PAYE income, as deductions in the code
  Note: This can be any non-PAYE income, such as untaxed interest, income from property and higher rate adjustment. It is not usual to include income returned on the self employment pages of the SA return in the code.
  There is
 
    • No separate limit to the amount of each deduction
 
    • No preferential order of deduction
 
    • No limit to the number of deductions that can be included
 
  • If there are sufficient allowances and reliefs to support the inclusion of more than £10,000 in the code, you may include increased amounts, with the individual’s agreement, up to the maximum of the 50 per cent K code limit
19. If the 50 per cent K code rule has now been reached or exceeded
 
  • Go to step 4 to calculate the reduction of non-PAYE income. Reduce the amount of the non-PAYE income included as deductions in the code to meet the 50 per cent K code limit. Any additional tax may have to be paid through SA

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Final action

20. Before finalising the code or codes, satisfy yourself
 
  • That the 50 per cent limit has not been exceeded
 
  • Non-PAYE deductions do not exceed £10,000
     
    Or
 
  • If you have been able to include a greater deduction, the individual has been advised and has agreed that the increased amounts can be included
 
  • If this is the first time that non-PAYE income has been included in the code, the individual has agreed that the CY code can be amended. If not, only amend the CY+1 code

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