PAYE11105 - Coding: codes: how they are used and calculated: code reductions

This subject is presented as follows

Code basis determined by the system
System holds insufficient information to revise code basis
Code basis altered
Jobseeker’s Allowance cases
Code BR or D prefix on WK1 / MTH1 basis at the primary employment
System printed explanations on form P2
Situations where there will be no printed explanation on form P2

Note: From 6 April 2016 the Scottish Government will be responsible for setting their own income tax rates for basic, higher and additional rate bands. Where the Scottish rate of income tax is applicable it will include an S Prefix to the tax code, for example, S1100L, SBR, S0T.

Further information about the Scottish rates of income tax is given at PAYE100035.

Note: From 6 April 2019 the Welsh Government will be responsible for setting their own income tax rates for basic, higher and additional rate bands. Where the Welsh rate of income tax is applicable it will include a C Prefix to the tax code, for example, C1100L, CBR, C0T.

Further information about the Welsh rates of income tax is given at PAYE100040.

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

From 2 July 2017, when we amend a customer’s code we will carry out a full calculation for the year.  Where extra tax is due the new code will include an In Year Adjustment (IYA) and In Year Adjustment Restriction (IYAR) to collect the extra tax over the remaining weeks or months of the tax year. The tax code will be operated on a week 1 or month 1 basis. This should mean that most of our customers pay the right tax and will not be overpaid or underpaid at the end of the tax year.

From the above date we will not calculate any further PUPs (Potential Underpayments) in tax codes.  We will refer to the extra tax due as an In-Year Adjustment (IYA) and the coding restriction will be described as In-Year Adjustment Restriction (IYAR).

Code basis determined by the system

The following tells you what action the system takes when a code is reduced.

Circumstances	Computer Action
Cumulative code is reduced or not operated code is reduced and the potential underpayment (prior 2 July 2017) or In Year Adjustment (from 2 July 2017) to date of change is less than £15	Cumulative coding operates.
Today's date is 6 January or later in the tax year and potential underpayment (prior 2 July 2017) or In Year Adjustment (from 2 July 2017) to date of change £15 or more but extra tax due to end of year is less than £100 from date of change	NOT OPERATED code basis given. Potential underpayment (prior 2 July 2017) or In Year Adjustment (from 2 July 2017) for the full year is calculated but not advised to the individual automatically on the form P2. To generate a note on the P2, enter the special note NOT OP. Further information on how to do this can be found at PAYE11035.
All other times	WK1 / MTH1 basis operated. Potential underpayment (prior 2 July 2017) or In Year Adjustment (from 2 July 2017) to the date of change is calculated and advised to individual on the form P2.
WK1 / MTH1 code is reduced	The WK1 / MTH1 basis continues to be applied. The In Year Adjustment (IYA) and In Year Adjustment Restriction (IYAR) are recalculated. The individual is advised on the form P2.
Reduction to code BR and WK1 / MTH1 basis	Code 0T will be allocated automatically.
Where code 0T is entered in the code field of a secondary employment record	The WK1 / MTH1 basis is given.

System holds insufficient information to revise code basis

When the system does not hold sufficient information to revise the code basis (such as the last cumulative or operated code), the existing basis will be continued. In such circumstances the code basis and any potential underpayment arising should be checked carefully and amended where appropriate.

Code basis altered

If you alter the system's decision on the code basis to be operated

• The system will recalculate any potential underpayment (prior 2 July 2017) or In Year Adjustment and In Year Adjustment Restriction (from 2 July 2017).

Jobseeker’s Allowance cases

In Jobseeker’s Allowance cases the cumulative basis will always be allocated. Further information is available at PAYE11100.

Code BR or D prefix on WK1 / MTH1 basis at the primary employment

If code BR or a D prefix code is to be applied on a WK1 / MTH1 basis on a primary employment source record take the following action

• Reduce allowances to nil, set the ‘No allowances’ indicator (see ‘Indicators’ at PAYE103065). The system will automatically set code 0T
• Over-ride the code to BR or the selected D prefix code in Edit Employments Allocations
• Change the basis to Week1 / Month 1

System printed explanations on form P2

A standard explanation, appropriate to the code change, will be printed on the P2 in the following situations

P2 notes printed prior to 2 July 2017

Situation	Text
New suffix code less than last operated code and Week 1 / Month 1 basis allocated and there is a potential underpayment (prior 2 July 2017). For example, code 500T becomes 385T WK 1, Potential underpayment £135 and SA indicator is set	You may pay too little tax Although we are changing your tax code(s), you may still not pay enough tax by 5 April YYYY. We think the amount you will owe HMRC is £PUP.  We will let you know if this amount is right when we look at your tax return for the year.
New K code higher than last operated code and Week 1 / Month 1 basis allocated and there is a potential underpayment. For example, code K150 becomes K200, potential underpayment £120 and SA indicator is not set	You may pay too little tax Although we are changing your tax code(s), you may still not pay enough tax by 5 April [YYYY]. We think the amount you will owe HMRC is £[PUP].  We will let you know if this amount is right when we check your pay and tax information at the end of the tax year. We usually collect the tax in equal instalments by increasing the tax deducted from your wages, salary or pension for 12 months from 6 April

Situations where there will be no printed explanation on form P2

The system will not print a standard explanation on the P2 in the following situations.

Situation	Action you should take
Code change follows an in-year Budget	None. There may be a centrally generated note.
Not Operated code is allocated by system and full year's potential underpayment (calculated prior 2 July 2017) is coded out in CY+1	If you decide to keep the Not Operated basis, enter the special note NOTOP and the amount. Further information on how to do this can be found at PAYE11035.
Only the suffix changes	None unless you wish to issue a letter.
Potential underpayment (calculated prior to 2 July 2017) to date of change more than £15 but potential underpayment from date of change to end of year is less that £100	Decide whether you want to change this basis. Take into account such factors as
-	The amount of the potential underpayment
-	The date of the code change
Suffix code increases (or K code decreases)and remains cumulative	None unless you wish to issue a letter.
Suffix code decreases (or K code increases) but remains cumulative. This will be where the potential underpayment (calculated prior 2 July 2017) is less than £15	None unless you wish to issue a letter.