PAYE11090 - Coding: codes: how they are used and calculated: ways an employer can apply a tax code

The employer can use some tax codes in more than one way. Sometimes the fixed rules issued to employers will tell them to apply the tax code in a certain way. On other occasions, you may have to decide how the code should be applied. In these cases, the employer will have to be notified.

Information is available on the following codes

Suffix codes and prefix K codes
Cumulative basis
Week 1 / month 1 basis
Prefix D codes
Code BR
Code NT
JSA claimants

Suffix codes and prefix K codes

Employers can use suffix or prefix K codes in one of two ways

  • On a cumulative basis
    Or
  • On a week 1 or month 1 basis

Notes:

  • From 6 April 2016, if the S prefix is included in the tax code, tax is deducted at the appropriate Scottish rates of income tax. for example S1060L, SK39.

  • From 6 April 2019, if the C prefix is included in the tax code, tax is deducted at the appropriate Welsh rates of income tax, for example C1060L, CK39.

Cumulative basis

Codes are most often operated using the cumulative basis. The employer uses the Tax Tables and Free Pay tables to give a proportion of any allowances and bands of tax rates for the pay period. This works on a rolling basis up to each pay day.

The employer takes into account any previous pay and tax for the year. The employer deducts more or less tax, or makes a refund, as the rate of pay rises or falls. The cumulative basis means that the amount of tax deducted during the year will be roughly correct for most cases.

Week 1 / month 1 basis

The week 1 / month 1 basis gives a proportion of any allowances and rates of tax for each pay period. However, it differs from the cumulative basis in that it ignores previous pay and tax. In effect all payments are taxed as though it was week 1 or month 1 of the tax year.

The aim of this basis is to prevent the employer making heavy deductions or giving any refund. You can tell employers to use any suffix or prefix K code on a week 1 basis. However, the fixed rules we issue to employers tell them to operate the week 1 basis automatically for some new employees, if certain conditions apply.

When an employer carries forward a current year code to the next year the instructions tell them to drop any week 1 basis and to operate the code on a cumulative basis.

Prefix D codes

From 6 April 2010, employers can operate prefix D codes both cumulatively and on a week 1 / month 1 basis, see PAYE11015.

Notes:

  • From 6 April 2016, if the S prefix is included in the tax code, tax is deducted at the Scottish tax rates for Scottish taxpayers at higher or additional rate, for example SD0, SD1

  • From 6 April 2019, if the C prefix is included in the tax code, tax is deducted at the appropriate Welsh rates of income tax, for example CD0.

Code BR

As a rule, BR is operated on the cumulative basis. However, if you reduce a code to BR you may have to tell the employer to use week 1 basis / month 1 basis. Also, no potential underpayment will be calculated or notified to the individual, so you will have to consider if you wish to tell the individual of this now, in advance of any end of year calculation.

Notes:

  • From 6 April 2016, if the S prefix is included in the tax code, tax is deducted at the Scottish tax rate for Scottish taxpayers at basic rate, tax code SBR

  • From 6 April 2019, if the C prefix is included in the tax code, tax is deducted at the appropriate Welsh rates of income tax, for example CBR.

Code NT

Code NT tells the employer not to deduct any tax. From 6 April 2010, the PAYE Service can issue code NT both on a cumulative basis and on a week 1 / month 1 basis.

In some cases, National Insurance (NI) contributions may still be applicable. For more information regarding employments where code NT may be appropriate, and where the employment may be considered ‘NI Only’ see PAYE11010.

Note: If code NT is issued on a cumulative basis the employer will refund the tax deducted, see PAYE11015.

There is no S or C prefix for code NT. The code NT is used for all residents of the UK regardless of where they live.

JSA claimants

The Department for Work and Pensions (DWP) / DWP Office works out the PAYE tax due

  • Only at 5 April or at the end of a benefit claim
    And
  • Only if the code is cumulative

Whenever you amend the code of a JSA claimant you should use the cumulative basis. A DWP Office may need to change a cumulative code to week 1 basis as follows

  • At the start of a claim where there are special features. These are listed at PAYE67000
  • At 5 April or at the end of a claim where the final figures show tax underpaid

When the DWP carries forward a code to the next year the instructions tell them to drop any week 1 / month 1 basis for all except occupational pensioners.