PAYE11105 - Coding: codes: how they are used and calculated: code reductions

This subject is presented as follows

Code basis determined by the system
System holds insufficient information to revise code basis
Code basis altered
Jobseeker’s Allowance cases
Code BR or D prefix on WK1 / MTH1 basis at the primary employment
System printed explanations on form P2
Situations where there will be no printed explanation on form P2

Code basis determined by the system

The following tells you what action the system takes when a code is reduced.

Circumstances Computer Action
Cumulative code is reduced or not operated code is reducedAndThe potential underpayment to date of change is less than £15 Cumulative coding operates.
Today's date is 6 January or later in the tax yearAndPotential underpayment to date of change £15 or moreButExtra tax due to end of year is less than £100 from date of change NOT OPERATED code basis given. Potential underpayment for the full year is calculated but not advised to the individual automatically on the form P2.To generate a note on the P2, enter the special note NOT OP. Further information on how to do this can be found at PAYE11035.
All other times WK1 / MTH1 basis operated. Potential underpayment to the date of change is calculated and advised to individual on the form P2.
WK1 / MTH1 code is reduced The WK1 / MTH1 basis continues to be applied.
Reduction to code BR and WK1 / MTH1 basis Code 0T will be allocated automatically.
Where code 0T is entered in the code field of a secondary employment record The WK1 / MTH1 basis is given.

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System holds insufficient information to revise code basis

When the system does not hold sufficient information to revise the code basis (such as the last cumulative or operated code), the existing basis will be continued. In such circumstances the code basis and any potential underpayment arising should be checked carefully and amended where appropriate.

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Code basis altered

If you alter the system's decision on the code basis to be operated

  • The system will recalculate any potential underpayment

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Jobseeker’s Allowance cases

In Jobseeker’s Allowance cases the cumulative basis will always be allocated. Further information is available at PAYE11100.

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Code BR or D prefix on WK1 / MTH1 basis at the primary employment

If code BR or a D prefix code is to be applied on a WK1 / MTH1 basis on a primary employment source record take the following action

  • Reduce allowances to nil, set the ‘No allowances’ indicator (see ‘Indicators’ at PAYE103065). The system will automatically set code 0T
  • Over-ride the code to BR or the selected D prefix code in Edit Employments Allocations
  • Change the basis to Week1 / Month 1

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System printed explanations on form P2

A standard explanation, appropriate to the code change, will be printed on the P2 in the following situations

Situation Text
New suffix code less than last operated codeAndWeek 1 / Month 1 basis allocatedAndThere is a potential underpayment. For example, code 500T becomes 385T WK 1, Potential underpayment £135AndSA indicator is set The amount of tax that you need to pay for the rest of the year has gone up because your tax code has changed. This means that from 6 April [TAX YEAR START DATE] and the date [EMPLOYER NAME] last used your old tax code you will not have paid enough tax. We think this amount is £[ESTIMATED UNDERPAYMENT]. We will let you know if this amount is right when we look at your tax return for the year to 5 April [TAX YEAR END DATE]. [EMPLOYER NAME] will now use your new tax code to collect the right amount of tax that you need to pay, from now on.
New K code higher than last operated codeAndWeek 1 / Month 1 basis allocatedAndThere is a potential underpayment. For example, code K150 becomes K200, potential underpayment £120AndSA indicator is not set The amount of tax that you need to pay for the rest of the tax year has gone up because your tax code has changed. This means that between 6 April [TAX YEAR START DATE] and the date [EMPLOYER NAME] last used your old tax code you will not have paid enough tax. We think this amount is £[ESTIMATED UNDERPAYMENT]. We will let you know if this amount is right when we check your pay and tax information at the end of the tax year. [EMPLOYER NAME] will now use your new code to collect the right amount of tax from now on that you need to pay.
New code higher than last operated code but remaining on a Wk 1 / Mth 1 basis, with potential underpayment reducingAndSA indicator is set We have changed your tax code again and your tax free amount for the year has changed. This means that between 6 April [TAX YEAR START DATE] and the date [EMPLOYER NAME] used the old code for the last time you will have had the benefit of too much tax free amount, and therefore owe a different amount of tax. We have worked the revised underpayment to be about £[ESTIMATED UNDERPAYMENT] but we will check when we look at your tax return for the year to 5 April [TAX YEAR END DATE]. Once [EMPLOYER NAME] use the new code you will get a proportion of the new tax free amount (we tell them to use your new code on a special basis) and the tax taken off you should be right from then on.
New suffix code less than last operated codeAndWeek 1 / Month 1 basis allocatedAndThere is a potential underpayment. For example, code 500T becomes 385T WK 1, potential underpayment £135AndSA indicator is not set Your tax-free amount for the year has gone down because your tax code has changed. This means that between 6 April [TAX YEAR START DATE] and the date [EMPLOYER NAME] last used your old code you will not have paid enough tax. We think this amount is £[ESTIMATED UNDERPAYMENT]. We will let you know if this amount is right when we check your pay and tax information at the end of the tax year. [EMPLOYER NAME] will now use your new tax code to collect the right amount of tax from now on that you need to pay.
Week 1 / Month 1 basis allocated without a potential underpaymentAndThe code does not contain state pension / benefits. For example the individual has started a new job but has not handed in a form P45AndYou have not deleted a potential underpayment in the calculation of the tax code We have told [EMPLOYER NAME] to use this code because we do not know what tax you have paid this year. When we do, we will tell [EMPLOYER NAME] the right tax code to use and if you are due a repayment, you should get this on your next pay day.
New code higher than last operated code but remaining on a Week1 / Month1 basis with potential underpayment reducingAndSA indicator not on record We have changed your tax code again and your tax free amount for the year has changed. This means that between 6 April [TAX YEAR START DATE] and the date [EMPLOYER NAME] used the old code for the last time you will have had the benefit of too much tax free amount, and therefore owe a different amount of tax. We have worked out the revised underpayment to be about £[ESTIMATED UNDERPAYMENT] but we will check after the end of the year and let you know. Once [EMPLOYER NAME] use the new code you will get a proportion of the new tax free amount (we tell them to use your new code on a special basis) and the tax taken off you should be right from then on.
Code is for CY+1 This tax code is for the year starting on 6 April next.

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Situations where there will be no printed explanation on form P2

The system will not print a standard explanation on the P2 in the following situations.

Situation Action you should take
Code change follows an in-year Budget None. There may be a centrally generated note.
Not Operated code is allocated by system and full year's potential underpayment is coded out in CY+1 If you decide to keep the Not Operated basis, enter the special note NOTOP and the amount. Further information on how to do this can be found at PAYE11035.
Only the suffix changes None unless you wish to issue a letter.
Potential underpayment to date of change more than £15 but potential underpayment from date of change to end of year is less that £100 Decide whether you want to change this basis. Take into account such factors as
  • The amount of the potential underpayment
  • The date of the code change
Suffix code increases (or K code decreases)and remains cumulative None unless you wish to issue a letter.
Suffix code decreases (or K code increases) but remains cumulative. This will be where the potential underpayment is less than £15 None unless you wish to issue a letter.