When you employ a new personal assistant, you will need to collect certain details about your employee. One of the things you need to know and record is your employee’s tax code.
Use the links below to find out more about tax codes.
What is a tax code?
How does a tax code work?
Dealing with in-year employee tax refunds
Where do I find my employee's tax code?
Will the tax code change?
Emergency tax codes
Other tax codes you might see
Employees with another job
Where to get further help
A tax code is used by an employer to calculate the amount of tax to deduct from an employee’s pay. A tax code is normally made up of numbers and letters for example 1150L or K396.
Under the Pay As You Earn (PAYE) system, an employee’s annual tax allowances are allocated evenly throughout the year. HMRC uses a tax code to tell an employer what tax free earnings an employee is entitled to in a particular pay period, so that tax at the appropriate rates may be calculated on the balance.
PAYE spreads an employee’s income tax bill over the tax year (which starts on 6 April of one year and ends on 5 April in the next) rather than paying tax in one lump sum.
Most people who pay tax in the UK are entitled to a personal allowance. In 2017/18, this is £11,500. This is the starting point for most tax codes.
If your employee has no other income, they can have employment earnings up to the amount of the personal allowance without having to pay any tax.
The basic tax code can be changed up and down. There may be other amounts to add to the basic personal allowance which will increase the amount they can earn before paying any tax – and therefore reduce the amount of tax they have to pay. There can also be deductions, such as tax underpayments, that reduce the amount the person can earn before paying any tax and therefore increase the amount of tax they have to pay.
The tax free amount, reduced or increased as necessary, is turned into a tax code. HMRC do this, but the easiest way to understand how it works is to take off the last number and add on a letter. For example, in 2017/18, someone whose tax free amount is just the personal allowance of £11,500 will have a tax code of 1150L. This code means that your employee is entitled to £958 tax free pay per month or £221 per week.
The letters used in tax codes often do not mean much to anybody. However they are there for HMRC to communicate with employers about changes to tax codes. Every year, for example, HMRC will issue guidance to employers telling them to uprate all ‘L’ codes for the new personal allowance amount. We talk about this annual process below.
Please note that from 6 April 2017, Scottish taxpayers will pay Scottish Income Tax SRIT. HMRC will tell employers whether or not to treat an individual employee as a Scottish taxpayer by issuing tax codes prefixed with an ‘S’ for Scottish taxpayers. Operating an S code should make sure the correct tax is deducted at the correct rate.
Most of the time, PAYE is calculated on a cumulative (i.e. ongoing) basis over a tax year. So, if your employee starts on 1 September 2017 having not worked at all since the start of the tax year (6 April 2017), in September they will be allowed £5,750 (6 months x £958) of pay free of tax, to use against that month’s wages. The tax free amount increases by £958 each month thereafter and it is only when the employee finally earns more than the tax free limit, that they will start to pay tax.
A cumulative tax code can also mean that you might need to pay a tax refund to an employee through the payroll. For example, an employee starts with you on 1 September 2017, with pay and tax from a previous job ended on 30 April 2017 of £1,000 and £20 respectively. In September they earn £500 with you. As they are allowed £5,750 of tax free pay at this point in the tax year, but have only actually earned £1,500, they have overpaid £20 in tax.
Typically you would refund this to them in their September pay packet on behalf of HMRC and fund the £20 by reducing any other amounts you need to pay over to HMRC for that same period. If your payment to HMRC for the same period isn’t sufficient to cover the tax refund, you can do either of the following:
- reduce your subsequent monthly or quarterly payments to make up the balance
- apply to HMRC for funding to cover the balance
For more information on reducing your subsequent monthly or quarterly payments to HMRC to recoup your employee’s tax refund, see our ‘paying HMRC’ section.
You can apply for financial help for an employee tax refund on GOV.UK.
As an employer your main role in relation to tax codes is to operate the code that HMRC give you and change the code when when tell you to change it. However, it is helpful to understand how tax codes work particularly if you are asked to operate an emergency tax code or BR tax code on your employee. We briefly explain both of these below.
When you first take an employee on, you will usually be able to work out their initial tax code from their form P45 or from the “Starter Checklist” explained in our guidance.
Once your new employee’s information has been sent to HMRC, they may issue you with an updated tax code. This will be sent by post, or may be seen online if you use HMRC’s PAYE for Employers online service.
It may change at the beginning of each new tax year to take account of any increases in the personal allowance and HMRC will advise you on what you need to do prior to the start of the new tax year. This will either be on form P9X as discussed in our news item or if your employee has a specific tax code, on P9(T).
Your employee’s tax code may also change during the year, if the employee's circumstances change, for example if they notify HMRC that they have a new source of untaxed income. HMRC will let you know if it changes. Once a code number is issued it remains in force from year to year until HMRC notify a change. You must not, under any circumstances, use another code unless advised to do so by HMRC.
During the year, any changes to an employee’s code number will be notified to you on form P6. This will be sent by post, or may be seen online if you use HMRC’s PAYE for Employers online service.
At the same time, HMRC will notify any changes of tax code to your employee and will give them a breakdown of the allowances that HMRC thinks they are due. The P6 that you receive as the employer, tells you what your employee’s tax code is, but does not break down the allowances or explain how the code was worked out.
It is always a good idea to make sure you understand generally how your employee’s tax works, so that you can answer any queries from them if they do not understand their coding notice or think it is wrong.
You may have heard people talk about an emergency tax code. Sometimes you may see something that looks like 1150L W1 or 1150L M1. This is an emergency tax code and means that only one week’s or month’s proportion of the allowances due for the tax year is given against each week’s/month’s pay.
As explained above, normally if someone has not worked since the beginning of a tax year and gets a job on 1 September, they will be allowed £5,750 (6 months x £958) of tax free pay to use against that month’s wages. This is because PAYE is calculated on a cumulative basis. But if they are on an emergency tax code, they will only receive one month’s worth – £958 – of pay free of tax to use against that month’s wages. In these situations PAYE is operated non-cumulatively, which means they do not get the benefit of their unused allowance since the start of the year. This will generally happen until a proper code is received from HMRC. Then the cumulative basis may come into play.
It is likely that you would operate PAYE non-cumulatively like this where, for example, your employee’s pay and tax details for an earlier part of the tax year are not known. Using an emergency code means they will be getting some benefit of the personal allowance each pay period, but the likelihood of there being a significant over or underpayment of tax at the end of the tax year is reduced. You can find out more about when to use these codes in the context of a new employee, in our guidance on the starter procedure.
There are other situations where an emergency code may be used. HMRC will tell you when you need to use one.
Other codes you may see include:
BR – means basic rate tax applies.
NT – means no tax is to be deducted.
D0 – means that all pay is to be taxed at the higher rate of 40% (2017/18) because all allowances and the basic rate band are used against other income.
D1 – means that all pay is to be taxed at the additional higher rate of 45% (2017/18) because the basic rate and higher rate bands have already been used against other income.
0T – which means there are no allowances left for that employment but tax will be deducted at the appropriate rates.
You can find a list of common tax code letters on the GOV.UK website.
You may be employing your PA on a part-time basis, so your employee may well have another job. If they do have another job, you may be told to use a BR code against the wages that you pay them. This is because all of their tax free amount will be used against the other job and so any wages from you need to be taxed at 20% to ensure there is no underpayment at the end of the year. You can see an example of how this works in 'Jenny'. (Note however, that there are many other reasons why your employee may have a code of BR and as such you must not assume they have another job if code BR is issued to them.)
If your employee is earning only a small amount in the other job, which when added together with the earnings from your employment does not exceed the personal allowance, then they can contact HMRC and ask them to split the allowances so that they do not have tax deducted by either employer. If they wish to do this, they should contact HMRC on the Income Tax helpline 0300 200 3300 (Textphone 0300 200 3319).
PAYE usually works best when an employee has a single, stable job that lasts a complete tax year. In any other situation, an employee could end up paying too much or too little tax by the end of the year. In these circumstances, HMRC will normally send out a tax calculation – a form P800 – at some time after the end of the tax year when they put all the employee’s records together. The P800 will tell the person that there is either an underpayment of tax (which will probably be ‘coded in’ and collected later on down the line) or an overpayment of tax (in which case a refund cheque should follow shortly).
There is nothing you need to do with regard to this, but it is important to be aware of it as it is a routine part of the PAYE lifecycle.
If you have any questions about the tax code HMRC have asked you to operate you should contact the Employer Helpline on 0300 200 3211 (Textphone 0300 200 3212).
The main Low Incomes Tax Reform Group website also explains how your employee can check their code number and any P800 calculation they receive.