PAYROLL INSIGHT
Tax codes
Jill Smith MCIPPdip, CIPP policy manager, provides basic explanation
What is a tax code? A tax code determines the amount of PAYE (pay as you earn) income tax a UK taxpayer is charged. The tax code describes to employers how much tax to directly deduct from an employee’s earnings before they receive any money. Tax allowances All individuals are entitled to allowances that serve to reduce the income on which they pay tax. The standard amounts of tax allowance vary according to the circumstances of the individual. The table below shows the allowances for 2018–19. The marriage allowance was introduced in April 2015 and is available to spouses and civil partners born after 5 April 1935. (Its formal name is the transferable tax allowance.) A spouse or civil partner who is a basic rate taxpayer can apply to HM Revenue & Customs (HMRC) to transfer £1,190 from his or her personal allowance to the other partner, who must also be a basic rate taxpayer. Following a successful application, HMRC notifies the employers about the revised personal allowances. Where the tax code comes from There are several ways in which an employer can receive a tax code allocation for an employee. A common way is through the form P45 on joining. Another is for HMRC to issue an official ‘notice of coding’ to the employer (with a copy to the employee on form P2). This notice of coding is usually referred to as a ‘P6 notice’ but can sometimes be issued as a ‘P9 notice’. If more than one coding is received in the pay
period, then use the one with the latest date of issue. HMRC normally issues an annual ‘blanket’ code change via form P9X. It is not uncommon for further tax code changes to be notified to employers after the annual Budget. Form P7X is used for this purpose. Forms P9X and P7X will typically require the numeric part of certain tax codes (determined by the suffix letter) to be increased (or, exceptionally, decreased).
Note that if the tax code is a letter ‘K’ followed by a number, it means that the total allowances in the code are less than the total deductions to be taken away from the allowances. In this case the number is added rather than deducted to determine the taxable income. For someone earning £20,000 with a tax code of, say, K1185 the taxable income would be £31,850 (£20,000 + £11,850). The letter (suffix) in the tax code helps an employer to work out how much tax to take from the employee’s salary. Most tax codes will have a suffix, signifying some aspect of the employee’s tax status. In 2018–19, the most common tax code is 1185L, used for most people with one job and no untaxed income, unpaid tax or taxable benefits. This reflects that the personal allowance is £11,850. Types of code ● M suffix – The individual is benefiting from the marriage allowance, receiving 10% of their spouse’s or civil partner’s personal allowance. ● N suffix – The individual has transferred 10% of their 'unused' personal allowance to their spouse or civil partner (i.e. marriage allowance). ● T suffix – This is used if the tax office needs to review a tax code – for example, because the tax affairs are complex, or estimated annual income is more than £100,000, which would affect the amount of personal allowance. An individual can also ask for a T code to keep their personal details confidential. ● K prefix – The total deductions exceed the allowances. If the untaxed income on which tax is still due is greater than the annual allowances, an individual will be given a K code, to ensure they pay tax on the excess. For more details, see www.gov.uk/ tax-codes. ● S prefix – In operation since April 2016 to identify Scottish rate taxpayers, it can be used with any tax code, including those with a K
...every person paid under a PAYE scheme is allocated a tax code...
Tax codes In the UK, every person paid under a PAYE scheme is allocated a tax code usually in the form of a number followed by a letter suffix (though other 'non-standard' codes are also used). Most tax codes are a combination of numbers and letters (e.g. 1185L, 384T, K384). The number is used to work out how much tax-free pay someone is allowed to earn in each tax year before they pay tax (https://bit.ly/2MocSAZ). It works as follows: the annual tax allowance equals the number × 10. For example, if someone earns £20,000 per annum and their tax code is 1185L their annual tax allowance would be £11,850 which is deducted from their annual salary to determine taxable income: £20,000 minus £11,850 = £8,150.
Income tax allowances 2018–19
£
Personal allowance (PA) Income limit for basic PA
11,850
100,000
Maximum amount of married couples’ allowance (MCA)
8,695 3,360 1,190 2,390
Minimum amount of MCA
Marriage allowance (transferable)
Blind person’s allowance
| Professional in Payroll, Pensions and Reward | October 2018 | Issue 44 26
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