PAYE11120 - Coding: codes: how they are used and calculated: issuing and amending a tax code

When making amendments to a code for CY and CY+1

• Check that you have details for the correct individual
• Check indicators
• If the RLS indicator is set no advisory message is being displayed for the form P2 (notice of coding) to tell you that the P2 output has been suspended. Once a new address is recorded work item 215 (PAYE106012) will be generated. For more information about suspended output see PAYE106010 
• Check Contact History and P11D information
• Check details recorded on the income, allowances, benefits and deduction area

When you issue a revised tax code you must first establish the tax code currently in operation with the employer or pension provider. This is to determine whether the revised tax code should be issued on a cumulative or on a week 1/month 1 basis.

• Check the record to determine whether this will be the first tax code issued by HMRC or whether HMRC have previously issued a tax code for the employer/pension provider

If a tax code has not been previously issued by HMRC you must review the start tax code for the employment.

• This can be reviewed by selecting the Edit Record icon next to the relevant employment on the employment summary screen. If the revised tax code is calculated as being lower than the start tax code it must be issued on a week 1/month 1 basis

This is particularly relevant when issuing a tax code for new pensions as the start tax code for all new pensions is PA on a week 1/month 1 basis, regardless of whether a primary or secondary employment is held.

• If HMRC has previously issued a tax code the basis of operation will be automatically calculated, so if the revised tax code is calculated as being lower than the previously issued tax code it would be calculated on a week 1/month 1 basis. However, you should ensure that this has happened before issuing the revised tax code

The process to issue a tax code is as follows:

Access the income, allowances, benefits and deductions (IABD) Landing screen, select the relevant entries for Form Type and Tax year. More information about the IABD Landing page is at PAYE130010. The Form Type ‘Calculation Only’ will trigger a coding calculation using information recorded on the system.

To update details and issue a new tax code select the appropriate form type and tax year from the drop down and make entries in the relevant IABD area. For example access Allowances and enter details of a new amount of Gift Aid payments made. More information on how to make entries is at PAYE130020. When the [Save] button is selected the IABD Landing screen is redisplayed with ‘SAVED’ in the status column.

Once the correct entries have been made on the IABD Landing screen, ‘Submit’ the entries to be saved on the system, Contact History will then be displayed. Enter the relevant Contact History details, more information about how to make entries is at PAYE105001. When Contact History is completed and saved a tax code calculation will be generated.

Entries on the IABD Landing screen will be required for each year that a code calculation is required. Where appropriate, entries made in CY will be carried forward to CY+1. Where entries are not required in CY+1 or a different amount is required in CY+1 then delete or enter the new amount in the CY+1 IABD screen. It is very important to review IABD for CY+1 as not all of the IABD CY updates carry forward automatically.

Note: If you make any changes from the date of migration to the date of the next annual coding please refer to the instructions at PAYE130020.

Enter income in the Non Coded Income field on IABD in the Earnings page that should not or cannot be coded. For example non-PAYE income that the individual has objected to being included on their SA return, foreign income in SA cases or any type of income that needs to be included in total income calculations, but should not be included as a tax code item. The Tax Code details screen will be displayed with a summary of the tax calculation in the top half of the screen followed by specific details of the tax calculation below. To the right of each row is a link that navigates the user to the Tax Code Details screen to display details about that tax code. On the Tax Code Details screen are links to calculations used in determining the tax code.

• View Total Liability calculation - an estimate of the total tax to be paid based on PAYE income, benefits and kind, non-coded income and investment income.
• View Adjusted Net Income calculation - an estimate of the income used in the calculation of age related allowances.
• View Employment Liability calculation - an estimate of the PAYE tax to be paid on the PAYE employment income.

For Personal Pension Relief, Gift Aid Payments and Higher rate adjustment a link to the right of allowance will display the coding calculation screen of the selected item. For Personal Pension Relief and Gift Aid Payments where there is no higher rate liability the source amount will be populated with the amount paid and the allowance amount will be zero. The P2 will not print these notes where the individual is not higher rate. Higher rate adjustment is displayed on the Tax Code Details screen as a deduction type, because the adjustment is calculated from a mixture of investment income details entered in income, allowances, benefits and deductions no source amount will be displayed.

The calculations are provided for illustrative purposes only to help with coding enquiries. The calculations are based on estimated income and tax figures; the correct tax liability will be reviewed at the end of the tax year when actual income details are known through the end of year reconciliation (PAYE93001) or Self Assessment tax return.

The bottom of the screen will display an Issue Forms section. The Issue Forms section provides two drop downs that allow you to issue or prevent a P2 or a P6 / P9 from being issued at this point. Where the Manual Code indicator is set any amendments to daily coding will default the P2 issue to not issue. Where a P2 is to be issued, change not issue to issue. The tax code calculation will look back at the last calculated tax code to work out the basis of operation, potential underpayment, and whether a P2 or P6 / P9 is issued or not.

Any later tax code calculations made on the same day will look back to the last tax code calculation made on the same day and then work out any further adjustments to the basis of operation, potential underpayment and issue of form P2 or P6 / P9. For example the first tax code calculation on a particular day calculates the tax code is 652L made up of Professional Subscriptions £50, personal allowance 6,475 on a cumulative basis and both P2 and P6 / P9 are set to issue. The tax code is amended to delete Professional Subscriptions £50 and replaced with job expenses £50, there is a change to the P2 but no change to the tax code to the employer. The P2 will be set to issue (The first P2 for the employment will not be issued) but the P6 / P9 will be set to not issue.

Issue a manual P6 for NT cases, the system will display a message ‘Employer Output Inhibited’ where NT tax code has been calculated. Select manual issue on the P6/P9 drop down box in these cases.

For domestic schemes, the Manual Correspondence to Employer indicator will be set on the individual’s employment record and you must issue a P12 for DOME scheme with a revised tax code and free pay. On the Tax Code details screen for P6/P9 issue, select ‘Manual issue’ from the drop down in the Issue Forms section and ‘Submit’. Record a Contact History note that a P12 has been issued manually.

You can also access the P2 special notes area from the [Notes] button. The [Notes] button will only be available when a P2 is to be issued. The [Notes] button also allows access to the fields to enter details of previous pay and tax that are to be included on a P6 to the employer so you will always need to issue a P2 where a P6 includes previous pay and tax. For example when you issue a duplicate P6 that includes previous pay and tax. Consider setting the special note ‘cumulative’ for these cases.

Where the system calculates that the tax due for the individual is equal or more than 50 per cent of their total income the system will inhibit the code issue. In these cases you will need to remove any non-PAYE income or underpayments included in the code calculation. On the income, allowances, benefits and deductions area make the appropriate entry in the Non Coded Income field (PAYE130035).

Where the system calculates that the tax due for the individual is equal or more than 50 per cent of their taxable pay for that employment the system will generate an advisory message. Take the action in PAYE11096 in these cases.

After the [Submit] button has been selected on the Code Details screen the Edit Employment Allocation screen will be displayed. From the Edit Employment Allocation screen you can

• View a list of the current live employments
• Amend the allowances given to a secondary employment
• Amend a tax code suffix
• Override a tax code
• Change the basis of operation of a tax code

If any amendments to the displayed code are made, the [Submit] button will be greyed out. Select the [Recalculate] button and the system will calculate the new tax code. Select the [Submit] button to record the change or continue to the next step if no change has been made.

Where there is more than one coded source access each source to review the Issue Forms P2 or P6/P9 section. The Issue Forms section provides two drop downs that allow you to issue or prevent a P2 or a P6 / P9 from being issued at this point.

Note: For records that have multiple employments / pensions at the same employer reference and more than one P2 or P6 is to be issued on the same day, the system will only issue one P2 or P6. In these cases, change the issue P2/P9 to Manual issue and use the SEES product to issue manual forms P2 and P6 for each record that a code is to be issued for.