tax codes advice
Table 2 Letter Meaning
L
Used for people born after 5 April 1948 and eligible for the basic personal allowance (£9,440 for 2013/14 and £10,000 for 2014/15)
P
Used for people born between 6 April 1938 and 5 April 1948 and eligible for the full lower age-related personal allowance (£10,500 for both 2013/14 and 2014/15)
V
Used for people born before 6 April 1938 and eligible for the full higher age-related per- sonal allowance (£10,660 for 2013/14 and for 2014/15)
T
Used where there are other items in the tax code that HMRC need to review, for example the reduction in the personal allowance where income exceeds £100,000
the last digit and reducing the number by one (see HMRC’s PAYE Manual at PAYE 11095.) For example, a person who is entitled to the basic personal allowance for 2013/14 of £9,440 and has untaxed income of £10,000 and a company car with a cash equivalent value of £3,000 would have a tax code of K355. Deductions (£10,000 + £3,000 = £13,000) exceed allowances (£9,440) by £3560. The number element is found by taking away the last digit to give 356 and taking away one to give 355. The K-code number is treated like extra income for the purposes of working out PAYE tax. The adjustment found from the pay adjustment tables is added to gross pay to date for a K-code, rather than deducting it as in the case of a suffix code. However, where an employee has a K-code, the permitted deduction for any pay period cannot be more than half the employee’s gross pay or pension. Where the amount of tax is restricted because of the operation of this limit, it is deducted at a later date.
Special codes There are also a number of other codes which are used for particular circumstances, such as where the employee has a second job. The codes are summarised in the table below. (See table 2.) Codes BR, D0 and D1 are commonly used for second and subsequent jobs
...SHOULD CHECK TAX CODES FOR REASONABLENESS AND ENCOURAGE EMPLOYEES TO DO LIKEWISE...
where the allowances (and, respectively, basic and higher rate bands) have been utilised by income from that first job.
Income exceeds £100,000 Where an employee’s income exceeds £100,000 the personal allowance is reduced by £1 for every £2 by which income exceeds this amount until it is fully abated. HMRC adjust the tax code to reflect any abatement of the allowance based on estimated income. The actual amount of the personal allowance will be recalculated once the personal tax return is submitted.
Emergency tax code
An employer may need to use a temporary code, known as the emergency code, until HMRC has issued a proper tax code for the employee. The emergency code is normally the suffix code for the basic personal allowance for the tax year, such that the emergency code for 2013/14 is 944L, reflecting the basic personal allowance for that year of £9,440. PAYE is normally operated on a cumulative basis. However, sometimes it is operated on non-cumulative basis taking account only of the income for that pay period rather than for the year to date. The non-cumulative basis is also known as the ‘month 1’ or ‘week 1’ basis, and the emergency code on a non-cumulative basis will be in the form of 944L M1 or 944L W1. Free pay is worked out as if the pay period was the first pay period for the year.
Deductions
Deductions may be made from the allowances to enable tax to be collected through the tax code. This can be for a number of reasons: l to collect tax on non-cash benefits – for example, if benefits with a cash equivalent value of £600 are reported in an employee’s P11D return, the allowances
Checking the code The correct tax can only be deducted if the tax code is correct. Employers should check tax codes for reasonableness and encourage employees to do likewise so that problems can be spotted early and notified to HMRC for them to issue a correct code.
PP PayrollProfessional 21
available to the employee are reduced by £600 in determining the number element of the code l to collect tax on expenses where no dispensation is in force l to collect tax on the state pension and other taxable benefits through the code – a person who has an age-related personal allowance of £10,500 for 2013/14 and who is entitled to the state pension of £5,577 will have net allowances of £4,923 (£10,500 - £4,923) and a tax code of £492P l to collect other income, such as untaxed bank interest, via the tax code, and l to collect underpayments of tax through the code. From 6 April 2014 it will also be possible to collect unpaid Class 2 national insurance contributions (NICs) through the tax code where the employee or pensioner is also self-employed and has outstanding Class 2 NICs.
Tax code notifications and changes Tax codes will generally change at the start of a new tax year to reflect changes in allowances for that year, for example in the increase in the personal allowance from £9,440 to £10,000 from 6 April 2014. Standard tax code changes are notified on form P9X which sets out the action that the employer will need to take to uprate the code for changes to allowances. Where an individual employee’s tax code changes by a non-standard amount, HMRC will issue a new year tax code form P9(T) which will tell the employer the code to use for the employee from 6 April. In-year tax code changes, for example to reflect a change in circumstance such as an employee being given a company car, are notified on form P6. Where a new employee joins in the year with a P45, the tax code is shown on the P45. Tax code notifications can be accessed through the PAYE online service or via a payroll software package if it supports this capability by using HMRC’s PAYE desktop viewer (PDV).
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