Tax codes are the basis of the whole PAYE tax system - and unless the code is correct, the PAYE system will not deduct the correct amount of tax from an employee’s pay.
The tax code determines how much pay an employee can receive before they have to start to pay income tax. This amount is known as the personal allowance, it changes every tax year and is set by the Chancellor in the Budget.The tax code is the personal allowance for the year with the last digit omitted and an “L” suffix.
So, for 2017/18, the personal allowance was £11,500, with an associated tax code of 1150L.
Updated tax codes for 2018/19
Tax codes need to be updated annually to reflect changes in allowances. For the 2018/19 year, the personal allowance has increased to £11,850. As an employer, if you do not receive a P9(T) form or an electronic coding notice for an employee, the following changes should be made to update an employee’s tax code for the 2018/19 year:
- Add 35 to any code ending in L; so 1150L becomes 1185L
- Add 39 to any code ending in M
- Add 31 to any code ending in N
Any week one or month one suffixes ( W1/M1 or X) should not be carried forward to 2018/19.
Tax codes BR, SBR, SDO, D1, SD1 and NT can be carried forward.
The emergency code for 2018/19 is 1185L.
If a new code has been received electronically or on form P9(T), that should be used instead.
Updated tax codes should be used from 6th April 2018.
Other tax codes explained
The PAYE system needs to accommodate a wide range of employee circumstances. For example, if an employee has more than one job, their personal allowance may be used up in their first job, meaning that all of their earnings in their second job should be taxed. In such a situation, the OT code should be used, which indicates no allowances.
An employee may have his or her pay taxed at the basic rate - tax code BR, at the higher rate - D0, or at the additional rate - D1.
A tax code of NT means that no tax is to be deducted.
Scottish taxpayers have an S prefix, indicating the Scottish rates of tax should be applied.
Adjustments under PAYE
Tax underpayments or the tax due on benefits in kind can be collected through the PAYE system. The appropriate tax code is worked out on the net amount of allowances minus deductions.
For example, if someone has a personal allowance of £11,850, and a company car with a cash equivalent of £5,000, the net allowance due is £6,500 with a corresponding tax code of 650L.
Where deductions exceed allowances, a tax code with a K prefix is used. This means the employee does not have any free pay and is treated as if they have received additional taxable pay.
A word about Marriage Allowance
Where one partner in a marriage or civil partnership is unable to use their personal allowance, they can transfer 10% of their personal allowance to their spouse or civil partner, as long as the recipient is not a higher or additional rate taxpayer. The partner transferring 10% of their allowance will have an “N” suffix on their tax code, while the recipient of the additional allowance will have an “M” suffix.
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Article by Lynne Gowers
Senior Marketing Executive, Liquid Friday.