PAYE13085 - Coding: coding: general principles: estimated income

Estimated income is the adjusted net income (ANI) and is used in the calculation of age-related allowances.

When calculating the age-related levels of Personal Allowance and Married Couple’s Allowance NPS will calculate the individual’s adjusted net income (previously known as net statutory income.

Adjusted net income is calculated as follows

• Stage 1 - start with Net Income (Chargeable income less deductions - for example job expenses, professional subscriptions, losses and loan interest)
• Stage 2 - deduct gross Gift Aid
• Stage 3 - deduct grossed up pension contributions paid under relief at source arrangements
• Stage 4 - add back any payments for life assurance made (payments to trade unions or police organisations including life cover)

The result is ‘adjusted net income’ this figure is used to calculate any reduced age-related allowances. Where the adjusted net income exceeds the income limit for age-related allowances the age-related Personal Allowance and Married Couple’s allowance are gradually reduced by £1 for every £2 of income down to the minimum amount of the allowance due.

When a taxpayer is due reduced age-related allowances they should usually be set up in Self Assessment so that an annual review of the allowances due can be made. The exception to this rule is where the taxpayer’s only source of income is one PAYE source and state pension which is within the DWP up-rating service.

You can use the link on the Tax Code Details screen to view the Adjusted Net Income calculation to compare this with the age-related income limit.

When calculating estimated income take into account any changes you know of from a return or otherwise. Note any increase in a public service or state pension. You will need to fully complete income details in income, allowances, benefits and deductions.

Estimated income appears on form P2 and can sometimes be a cause of unnecessary correspondence. Entering an estimated income amount ensures that the correct P2 note is included for reduced age-related allowance cases. There are some cases when it is not necessary to enter estimated income.

As a general rule it is not necessary to enter estimated income if

• The individual is entitled to the maximum amount of the allowance

• The estimated ANI is such that the individual is obviously due the minimum amount of the allowance and is unlikely to be due full or reduced age-related allowances in the foreseeable future

Note: Where you are updating CY IABD with state pension details in the year of commencement, entering the estimated income amount will ensure the correct amount of age-related allowances are calculated.

In day to day work, if you have full income details in IABD you should

• Remove any existing estimated income amount and let the system use the total income details to establish the correct amount of age-related allowances due as part of the tax code calculation
• Where the tax code calculation establishes that reduced age-related are not due and either full or minimum age-related allowances are due then issue any tax code changes as necessary
• Where the tax code calculation establishes that reduced age-related allowances are due

• • Make a note of the ANI figure from the coding calculation. This is found in the Tax Code Details screen by selecting the View Adjusted Net Income Calculation
  • Cancel out of the tax code and go back to IABD and enter the ANI figure into the Estimated Income field
  • [Submit] and [Save] the change and issue any necessary tax code(s)

When updating CY IABD with state pension details in the year of commencement, and ‘annual’ NIB has been coded you should

• Make a note of the ANI figure from the coding calculation
• Manually recalculate the ANI by including the ‘actual’ NIB amount which will be received in the year of commencement, rather than the ‘annual’
• Use the recalculated ANI to check whether reduced age-related allowances are due
• If reduced age-related allowances are not due, [Submit] and [Save] the change and issue any necessary tax code(s)
• If reduced age-related allowances are due, cancel out of the tax code and go back to IABD and enter the recalculated ANI figure into the estimated income field
• [Submit] and [Save] the change and issue any necessary tax code(s)
• Where you have entered a recalculated ANI into the CY estimated income field, you must also enter the estimated income amount in CY+1, including the ‘annual’ amount of state pension

In day to day work if you don’t have full income details in IABD and there is an existing estimated income figure

• Leave the figure already entered in IABD

• Issue any necessary tax code(s)