PAYE coding notices (forms P2) can seem very confusing and so we hope in this section to shed a little light on some of the items on the notice.

What is Pay As You Earn (PAYE)?

Getting help

Who gets coding notices and when?

What is on a coding notice?

Coding letters and numbers

K Codes & other types of code number

Working out your tax from your code

How do coding restrictions work?

What is Pay As You Earn (PAYE)?

• This means just what it says! It is the way in the UK that amounts of tax and NIC due are collected from the wages and salaries of employees and how tax is collected on most occupational pensions based on past employment.



• Each time you are paid you may receive a slip or other notice showing your total pension and the tax taken off but not all pension companies do this - some will only send out a payslip if there is a change to the amount of tax you will be paying. Your pension provider then pays the tax over to the Revenue.



• Your pension provider knows how much tax to take off because the Revenue tell them to operate a code number on your pension. The code tells the pension provider what allowances he can set against your pension.



• The Revenue let you know what code your pension provider should be operating by sending you a form called a Notice of Coding (form P2). Your employer should get a version of this called a P6 with just the code number and no details of how it is arrived at.



• The form P2 sets out your allowances and takes off any amounts that reduce those allowances. As previously mentioned, the balance is then available to be set off against your pension. Have a look below at what is on a coding notice as this makes it much easier to understand.



• Your pension provider deducts tax based on information given to him by the Revenue so that you just receive the net amount after this tax has been taken off.



• The idea of PAYE is to try to make sure you have paid the right amount of tax due on your income by the end of the tax year. The tax is collected from each weekly or monthly payment of pension that you receive so that if it is correctly operated, you should have no additional tax to pay at the end of the year.



• The PAYE system may also be used to collect tax on your other untaxed income (such as untaxed interest, that is interest paid with no tax taken off or rents ) by including the income in your coding notice as a reduction to your allowances.

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Getting help

• The address and phone number of the HMRC Contact Centre you may need to contact if you have any queries will be shown on your coding notice or on any correspondence you have received from the Revenue. It will be an 0845 number and the call will be charged at local rate. However a word of warning regarding how difficult it can be to speak to anyone at one of these Contact Centres - to see the problems we encountered have a look at our article on this topic



• If you are having problems in visiting the Revenue because you have limited mobility or caring responsibilities and cannot get to one of their Enquiry Centres, you can ask them to come to you instead. If this applies to you do make sure you exert your rights to a home visit.



• If you have a BT phone you can check in the phone book for details of your local tax office. If you are using any other company you can still get details from the Yellow Pages under Government Offices. You should phone the local office explaining your circumstances. They may need to get your file from your own tax office and this may take a few days. The local office will make an appointment for someone to visit you. You may be asked for your National Insurance number and/or your tax reference so it is as well to have your coding notice or a note of these handy when you make the call.



• A number of Revenue offices have Typetalk facilities available. The phone numbers will be located in the Revenue details box in the phone book or the Government Offices section of the Yellow Pages if you need to contact your local office or they should be shown on any correspondence you have from your own tax office.



• Alternatively it is possible to arrange for a British Sign Language (BSL) interpreter to be present at a face-to-face meeting at a Revenue Enquiry Centre.

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Who gets coding notices (form P2) and when?

• For anyone receiving State pension and other sources of income such as an occupational pension or if you receive untaxed income such as interest paid without tax being deducted, a coding notice will be normally issued in January or February before the next tax year begins in April.



• If your coding notice is amended for any reason you will get a new notice once the changes have been processed. This can happen at any time during the current tax year. Do make sure that your employer or pension provider is using the new code number - you might need to check a couple of weekly or monthly payslips to give them sufficient time to amend the payroll. If you have overpaid tax because of any delay this should automatically be repaid in the first pay packet the new code is operated, provided it is during the same tax year - otherwise you may need to claim a repayment. Most of the time of course, there will be no problem but just because you have had a new code number it does not necessarily guarantee it will be operated.

What is on a coding notice (form P2)?

Just to help you work round the form we suggest you have a look at your current coding notice as you read through the following points:

1. At the very top of the notice is a box with a tax year in it, for example 2008/09. A tax year runs from 6 April to 5 April and is not the same as a calendar year. To understand the year that this relates to, the simplest way is the take the later of the two years shown - in this case 2009, so the year the coding relates to is the year to 5 April 2009. Similarly a coding notice for 2009/10 will relate to the tax year ended 5 April 2010.



2. At the top on the left is the address box with your full address. You should always check to see that the information given is correct.



3. The top section of the notice also contains the phone number of your Contact Centre. These numbers all start 0845 and so are charged at the price of a local call.



4. The date of issue of the notice is shown together with your PAYE tax reference for the source of income to which the code relates and your National Insurance number.
   
   Pay As You Earn or PAYE is the method the Government uses to collect tax from people who receive pensions or wages. Your pension payer or employer deducts tax using the code number issued by the Revenue. You just receive the net amount after this tax has been taken off.
   
   Each pension payer or employer has a unique PAYE tax reference in the form 123/A456 or 123/4567. The reference enables the Revenue to identify them.



5. Moving down the form after Dear... the next line in bold tells you which tax year the notice relates to and the code to be operated for that year.



6. The notice then goes on to tell you which employer or pension payer the coding relates to.



7. The area enclosed in the box is where your code number is worked out. Allowances are listed first and any items that reduce your allowances are then worked out in the left had column as minus figures. These are totalled and are then deducted from your allowances to give you the figure of tax free allowances available to be set against your wages.
   
   
8. After the calculation the coding notice explains what your code number will be based on the allowances worked out above.

At the end of the form there are notes which are intended to highlight or explain points that arise from the coding notice. These may include advising you if you are a pensioner as to:

• what income you can receive before your higher personal allowance will be restricted;
• any estimates made in the form regarding annuities or occupational pensions;
• details of state benefits or state pension receivable in that year;
• a calculation of the rates of tax which will be applied to your pension.

If you are an employee the notes may include:

• details regarding the allowances available to you;
• details of any expenses or subscriptions you have claimed;
• an explanation of how relief is given on a personal pension you might be paying;
• details of how amounts due for an earlier year are to be collected or what other restrictions are included in your coding,
• details of the rates of tax that apply to your wages and any savings income you might have.

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Coding letters and numbers

• The number in your code comes from the calculation box on page 1 of the coding notice.



• The code number itself is worked out by taking anything that reduces your allowances from the amount of allowances you are entitled to. The balance is then divided by 10 and that the result becomes the number part of your code, for example, 668P.



• The letter is just to help the person paying your wages. It tells them what type of taxpayer you are. The main codes which will be used are listed below but if you want firstly to have a look at what we mean by some of the terms used below you can find information on personal allowances here and on Married Couple's Allowance here



• L
  This code is used if you just have the basic personal allowance e.g. 603L



• P
  This code is used where you receive a full personal allowance and you are aged between 65-74 at some point in the tax year e.g. 903P



• Y
  This code is used where you receive a full personal allowance because you become 75 at some point in the tax year or are already more than 75 years old e.g. 918Y



• V
  This code is used when all the following apply:
• you receive full age allowance for those 65-74
• you receive full married couple's allowance as either or both of you were born before 6 April 1935 and both of you are aged under 75
• you are a basic rate taxpayer e.g. 440V



• T
  This is a code used in several situations. For example if you do not want your employer to know your tax status, you can ask you tax office to use this letter.
  
  This code is also used where your personal allowances have to be reduced because your income exceeds the income limits. You will then be given a code 0T (for an explanation - click here)



• It is also used where no tax will be deducted from your income. The code given then is code NT

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K Codes & other types of code number

Your tax free allowances are shown first in the calculation box on the coding notice and anything that reduces your allowances (your deductions) is shown with a minus sign. To get your tax-free amount you need to take your total deductions from your total allowances.

However, when the deductions from your allowances are more than your allowances, the result is a negative or minus figure of allowances.

These minus allowances are treated as if you receive extra income of that amount on which you will need to pay tax. To collect the additional tax due a special code number is operated. When this applies to you, instead of one of the letters above you will have a code that starts with a K. To work out your code number is easy - if your minus allowances came to £2,970 - divide this amount by 10 so you get 297 and take off one. This means your K code will be K296.

The tax deducted each week/month using a K code cannot be more than 50% of your pension for that period.

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Working out your tax from your code

• We have two easy examples for you to follow to give you an idea of how to work out your tax based on your code number.
• You can see how to work out your tax in the examples Tom & Harriet

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How do coding restrictions work?

For the purpose of this section we will assume that you are a basic rate (20%) taxpayer.

Coding out an underpayment

• These types of underpayment relate usually to one of the following liabilities:



• an underpayment on your self assessment tax return for an earlier year which is being included in a later year's coding notice rather than being paid directly.



• where there is an estimated underpayment on an earlier year's coding notice which the Revenue have said they will collect the following year.


• The Revenue will include a restriction in your coding notice so that when your employer operates the code each week or month they will collect a proportion (1/12 or 1/52) of the amount of tax you owe. This restriction is worked out quite simply - it is the underpayment multiplied by 100 and then divided by 20.



• Example
  Say you have an underpayment of £400. Your coding notice will show a restriction of £400 x 100/20 or £2,000. The underpayment included in your coding of £2,000 will be taxed at basic rate (20%) which is equal to tax of £400.

Married couple's allowance restriction

• For 2008/09 the rates of MCA are:
  Age under 75 and born before 6 April 1935
  £6,535 MCA @ 10% = £653.50
  Age over 75
  £6,625 MCA @ 10% = £662.50



• If you are 75 at any time in the tax year you will get the higher allowance for the whole of that year.



• The allowance is set annually and is different from a personal allowance as it does not reduce your income, but is used to calculate an amount to come off your tax bill.



• 10% of the allowance set for a year can come off your tax bill. So for 2008/09 the allowance up to age 74 is £6,535 so that 10% or £653.50 can come off your tax bill. For those aged 75 and over, £6,625 is the allowance, so £662.50 can come off the tax bill.



• If you are a basic rate (20% taxpayer) - you will be getting your married couple's allowance allowed at 20% in your coding notice. However as we have already seen you are only entitled to tax relief of 10%. To stop you underpaying tax, the Revenue put a restriction in your coding notice. The amount of the restriction will depend on your age - for 2008/09 this will be £3,268 if you are under 75 or £3,312 if you are over 75.
  
  So the allowance given in your coding works out like this:
  
  £(Allowance 6,535 - restriction 3,328) = £3,327 x 20% = £653.50
  £(Allowance 6,625 - restriction 3,312) = £3,313 x 20% = £662.50



• If you are aged 65-74 and your wife or civil partner has elected to receive £2,540 of the allowance so that you get the balance of £3,995 - the allowance given in your notice of coding then becomes £3,995 and the restriction is £1,998. For those over 75 the appropriate amounts are £4,583 and the restriction is £2,540. If you want to see how this is worked out it is similar to the calculation in the above bullet point so:
  
  £(Allowance 3,995 - restriction 1,998) = £1,997 x 20% = £399.50
  £(Allowance 4,583 - restriction 2,540) = £2,043 x 20% = £408.60
  


• However watch out! - the Revenue has started to leave out the restriction from coding notices where they consider that there will be no further tax to pay for the year. If you see the restriction is missing from your coding notice you may want to contact your own tax office and ask them to explain why they have done this.

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