PAYE13075 - coding: coding: general principles: higher rate taxpayers

Where a taxpayer is liable to higher rate tax there are special rules about the coding. The precise rules to follow depend on how many PAYE sources the taxpayer has. Remember to use COP Function CD or TA to set the HRS signal in all main source cases where the taxpayer is liable at the higher rate.

The remainder of this subject is presented as follows

Items for which an adjustment is required in the code

More than one coded source: allocating rates

Rates at which taxed income charged

Using Coding Assistant (CA)

Using P202

When to include an adjustment for taxed income

Working out HRA

Items for which an adjustment is required in the code

Where the taxpayer is liable at the higher rate, certain items included in the code may need adjusting to ensure we get the correct PAYE result. The relevant items are listed below, along with the appropriate coding entry.

When you work out an allowance or deduction covered in this table, refer to chart P202 for the appropriate year.

More than one coded source: allocating rates

Where the taxpayer is liable at the higher rate you may have to spread the tax rates over two or more PAYE sources. The general rule is that the main source office should tell all sub-sources to issue code D0. This tells the employer to deduct tax at the higher rate on all payments.

There are two notable exceptions to this rule.

The first is where the taxpayer has asked you to use the rates in a specific way. Here you should issue codes that comply with the taxpayer's wishes.

The second is where you should use BR. You may see cases where, on the main source income alone, the taxpayer is liable at the basic rate. It is the sub-source income that takes him or her into higher rates. In other words there is a balance of the basic rate left over from the main source income. If you simply code the sub-source D0, then the taxpayer will pay too much tax. If you tell the sub-source to use code BR he or she will be underpaid. The answer is to include a basic rate restriction at the main source and to tell the sub-source to use code BR.

Rates at which taxed income charged

There were significant changes in the income tax treatment of taxed income from 1996-97 and from 1999-2000.

From 1996-97 to 1998-99, most sources of taxed income (apart from discretionary trust income and a few other exceptions) will have been charged to tax at the lower rate of 20 per cent.

From 1999-2000, tax credits attached to dividend income reduced from 20 per cent to 10 per cent.

Using Coding Assistant (CA)

The SEES Coding Assistant is mandatory and must be used in all cases.

You must also use the ‘Copy for ENOTE’ facility within the CA. This will help future staff dealing with correspondence, reduce the number of Contact Centre referrals and help QA / QC reviewers understand how the code was calculated.

Using P202

When the adjustment has to be calculated manually the P202 tells you how to adjust certain items before including them in the code. This will involve multiplying the amount of the item by a given factor to give you the adjusted amount to be included in coding.

In some cases a different factor is used where the taxpayer is only liable at the basic rate at the main PAYE source.

When to include an adjustment for taxed income

Only adjust the coding for taxed income where

• The taxpayer agrees
• The taxed income amount includes no item
• • Subject to Double Taxation relief
  • Arising during the administration period of an estate
  • That includes income from a discretionary trust
  • Which may be affected by top slicing provisions

It is acceptable for an adjustment to be made to the code even if the taxpayer also has taxed income as listed above.

Working out HRA

From 6 April 1999 tax credits attached to dividend income were reduced from 20 per cent to 10 per cent. Individual shareholders liable at the lower or basic rate will continue to have no additional tax to pay on their dividends. Those liable at the higher rate of tax will see no change in their tax bills because

• Although the new tax credit reduces the credit to be set against tax to 10% it also reduces the income brought into charge
• The new 'higher rate' is 32.5 per cent rather than 40 per cent

Tax on savings income remains at 20 per cent with no additional liability for those liable at lower or basic rate.

You will not need to make two separate calculations for HRA where a taxpayer has both savings and dividend income if you use the figures of net income.