2017/2018 PAYE tax codes – your guide. All employees (including directors with shareholding) receive a tax code from HMRC which helps employers understand how much tax and National Insurance to deduct from their wages.
What should my PAYE tax code be?
Tax codes are issued by HM Revenue and Customs (HMRC) soon after an employee starts a job, every year when personal allowances change, and when there is a substantial change in an employee’s salary (for example, sales reps whose bonuses and commissions push them from one tax banding to another).
There is an online HMRC questionnaire where taxpayers can check their tax code for themselves – click here to try it.
The online questionnaire will not work for you if the way you pay your income tax is via Self Assessment.
What do the numbers on my tax code mean?
HMRC uses a four-step process to work out the number part of your tax code.
First, they take your tax-free personal allowance for you for the year. Then they take income you’ve not paid any tax on like interest payments you’ve received or any part-time earnings you’ve received.
They also consider any benefits-in-kind you’ve received, like a company car.
Any income that you’ve not paid any tax on is then subtracted from the personal allowance. What’s left is your actual personal allowance for the year.
They then remove the last number from the your actual personal allowance – for example, if your personal allowance was £11,200, it would appear at 1120 on your tax code.
The standard basic rate tax code
All basic rate tax payers and higher rate tax payers (up to earnings of £100,000) have a personal allowance of £11,500 a year. You don’t have to pay any income tax on earnings below that amount.
For basic rate taxpayers, they will receive the 1150L PAYE tax code.
If you’re an employer, HMRC advices that you should use 1150L unless they indicate otherwise or if your employee has a tax code in the previous year that was not the basic rate tax code.
0T tax code
If your employee’s personal allowance has been used up in its entirety, they will have the 0T tax code for the remainder of that year.
0T is also sometimes used if an employee has just started working at your company but you have not received from them the information you need to generate the correct tax code for them.
Single person tax code and married person tax code
There is a benefit that married couples and those in civil partnerships can pass on to their significant other.
It’s called the Marriage Allowance and it lets one spouse or civil partner to transfer 10% of their personal allowance to the other. 10% of the current personal allowance is £1,150. If they transfer it to their partner, this results in a tax saving of £225 for the year.
In order to qualify, the following conditions must be met:
- one of the spouses or civil partners must be earning less than £11,500 a year
- the other spouse or civil partner earns between £11,500 and £45,000 (£43,000 in Scotland).
For an employee to apply for the Marriage Allowance, they can do so at the relevant section of HMRC’s website – click here. If you run a family business in which your spouse or civil partner takes an active role, it may be much more advantageous for you to issue shares to your significant other and pay them via salary and dividends.
What affect does this have on a tax code?
- The spouse or civil partner whose 10% has been transferred has an “N” on their tax code
- The spouse of civil partner in receipt of the 10% benefit has “M” appended to their code.
Your tax code if you earn more than £100,000
For employees that earn £100,000 or more, their personal allowance decreases by £1 for every £2 they are paid (by whatever means, known as adjusted net income) above £100,000.
Once your employee’s salary reaches £123,000, they no longer have a personal allowance.
If their salary is greater than £100,000, the letter in their tax code is “T”.
To work out adjusted net income, you need to add up:
- self-employed income
- qualifying state benefits
- rental income
- trust income
- savings interest, and
- tax relief on payments to trade unions and police organisations.
From that total, you then subtract the following:
- tax reliefs (gross payments made into a pension scheme and any trading losses)
- Gift Aid donations
- contributions to pensions schemes where the provider has already given you tax relief.
Emergency tax code
Emergency tax codes are shown as:
- 1150 W1
- 1150 M1
- 1150 X
Emergency tax codes are normally assigned to employees new to your company or who have returned to employment after a spell of self-employment.
They may also be given to staff members who receive company benefits or the State Pension.
By their nature, emergency tax codes are temporary. If you have the information you need to update your employee’s tax code, you can do so by clicking here.
PAYE if you owe tax
HMRC will alter your employee’s tax code so that they collect any outstanding and unpaid tax. When running your payroll, you must make these extra deductions and transfer them to HMRC via payroll by the 22nd of the following month after you’ve collected the money.
They have recently increased the amount of money they can deduct from your staff member if their earnings are greater than £30,000. How much is taken is determined on a sliding scale based upon your employee’s main PAYE-qualifying income.
The current scale is as follows:
|Employee’s PAYE earnings||Maximum annual tax repayment|
|Up to £29,999.99||£3,000|
Under the current system, HMRC may compel you to collect up to £17,000 from your staff member if they’re earning more than £90,000 in a tax year. HMRC refer to this process as “coding out”.
Employees can run up debt with HMRC by:
- having outstanding balancing amounts from periods when they completed a Self Assessment,
- PAYE underpayments
- National Insurance debts
- being overpaid tax credits.
Tax codes if you have more than one job
If your employee has more than one job, they may be assigned the following tax codes:
- BR (taxed at the basic rate)
- D0 (taxed at the higher rate)
- BR (taxed at the additional rate)
In April 2016, the income tax system in Scotland diverged from the income tax systems in England, Wales, and Northern Ireland. The new parallel systems are identical except for the rate at which taxpayers start paying higher rate tax.
From April 2016, the income tax system slightly differs between Scotland and the rest of the countries that form the United Kingdom.
|Tax band name||Scottish bands||Rest of UK bands||Applicable income tax rate|
|Personal allowance||Up to £11,500||Up to £11,500||0%|
|Basic rate||£11,501 to £43,000||£11,501 to £45,000||20%|
|Higher rate||£43,001 to £150,000||£45,001 to £150,000||40%|
|Additional rate||Over £150,000||Over £150,000||45%|
Taxpayers living in Scotland and who are subject to Scottish Income Tax have the letter “S” prefixed to an their tax code.
“K” tax code
Staff members with a “K” tax code have income that’s not being taxed in a different way. That income is worth more than the tax-free allowance. The “K” code means you take the tax due on the income that’s not been taxed so far from either your employee’s wage or pension.
If they have the “K” tax code, you can’t deduct more than half of their pre-tax wages.
Other “K” tax code employees will either be:
- paying tax they owe from a previous tax year,
- in receipt of taxable state benefits like the Employment and Support Allowance, Carer’s Allowance, Jobseeker’s Allowance, or the State Pension, or
- receiving benefits-in-kind from your company
Get help with PAYE and tax codes
Payroll is a complex issue for many employers. To get the help with all issues payroll, PAYE, and tax codes, call our team.