This article explains the most common entries on a PAYE Coding Notice.
Common ‘Allowance and relief’ entries
Personal Allowance
This is the amount of taxable income that you can receive tax-free in the current tax year.
Blind Person’s Allowance
This is a flat rate tax-free allowance which you can claim if you’re certified blind and are on a local authority register of blind persons, or if you live in Scotland or Northern Ireland and are unable to perform any work for which eyesight is essential. If you’re entitled to it, it should show on your Coding Notice after the Personal Allowance.
Married Couple’s Allowance
Married Couple’s Allowance (where you or your spouse or civil partner were born on or before 5 April 1935) is an allowance that reduces your tax if you’re a taxpayer. The note on your Coding Notice will tell you what Married Couple’s Allowance is worth to you in terms of a tax reduction and how your tax code number has been adjusted upwards to give you the correct relief.
Maintenance Payments relief
As with Married Couple’s Allowance, Maintenance Payments relief (where you or your spouse or civil partner were born on or before 5 April 1935) is an allowance that reduces your tax if you’re a taxpayer.
The note on your Coding Notice will tell you what Maintenance Payments relief is worth to you in terms of a tax reduction and how your tax code number has been adjusted upwards to give you the correct relief.
Other allowances and reliefs
Other entries on your PAYE Coding Notice might include:
- professional subscriptions
- flat rate job expenses (for work tools or specialist clothing)
- other job expenses
- payments towards a retirement annuity
- double taxation relief
- foreign pension allowance
- higher rate tax relief on gift aid payments
- higher rate tax relief on pensions you’re paying into
- loss relief
- loan interest
- balance of tax allowances (from another job or pension)
Depending on the type of entry, the effect of adding these amounts to the income you can receive tax-free is one of the following:
- you’re not taxed on the income you use to make those payments
- you won’t pay tax on some or all of that income
- you’ll get tax relief associated with a payment
Items that can reduce your tax-free amount
The negative entries showing on the PAYE Coding Notice take account of amounts of taxable income that HM Revenue & Customs (HMRC) believes you’ve already received or will be receiving this tax year without tax taken off. They may also include taxable company benefits or tax owed from a previous year.
The amounts HMRC deducts ensure you pay the right amount of tax on these items.
They might include:
Reduction to collect unpaid tax
If you owe tax from a previous year, the easiest way for HMRC to collect this (if it’s under £2,000) is to reduce your tax-free allowances by the amount of income on which the outstanding tax is owed. This enables them to collect the correct amount of owed tax through PAYE (Pay As You Earn) each week or month. (If you owe more than £2,000 they will send you a tax bill.)
‘Adjustment’ to 20 per cent rate band
You will see this if you have two or more jobs or company pensions at the same time and you pay tax at basic rate (20 per cent) on each – but the level of your income taken together means that you have to pay some tax at the higher rate band of 40 per cent. To collect the additional tax (and make sure you don’t end up owing tax at the end of the year) HMRC reduces your tax-free amount for your main job or pension by an amount that has the effect of collecting the additional tax you owe.
State Pension
The State Pension is taxable income, but paid to you by the Department of Work and Pensions without tax taken off. To make sure you pay tax on it, HMRC deducts its annual value from your tax-free allowances.
Other taxable state benefits
If you’re receiving taxable state benefits, HMRC deducts their annual value from your tax-free allowances to make sure you pay tax on them. For example, Incapacity Benefit paid after the first 28 weeks is taxable but you receive it without tax taken off.
Taxable company benefits (car, van, fuel, medical insurance etc).
The value of these sorts of benefits (provided by your employer) is taxable so they need to be deducted from your allowances and reliefs.
Gift Aid adjustment
You may see this if you made Gift Aid donations but hadn’t paid enough tax to cover the amount the charity will reclaim. The deduction from your tax-free income will make up the difference.
Income from annuity
If you’re receiving taxable annuity payments without tax taken off, HMRC deducts the annual value from your tax-free allowances to make sure you pay tax on this income.
Property income
Any rental income (less allowable expenses) not covered by the Rent a Room scheme is taxable, but you receive it without tax taken off so it needs to appear here.
Interest without tax taken off
An estimate of untaxed interest HMRC expects you to receive will show here to make sure you pay tax on this income.
Savings income taxable at 40 per cent
Savings income is taxed at 20 per cent before you get it and dividends (income from shares) at 10 per cent. If you’re a higher rate taxpayer you will owe the difference between 20 per cent and 40 per cent on savings income, and between 10 per cent and 32.5 per cent on dividend income. The amount shown on your Coding Notice has the effect of collecting the difference.
Other pensions/earnings/commission not taxed when you receive them
HMRC’s estimate of other untaxed pension/earnings you receive will appear on your Coding Notice. By deducting the value of these from your allowances they will collect the estimated tax due on that pension or other income. If at the end of the tax year it turns out that the amount you received is greater than estimated they will ask you to pay tax on the difference.
Other deductions
The above list isn’t exhaustive, but covers some of the most common items that reduce your tax-free amount entries. However, the principle applied is the same for all – the amount shown is deducted from your tax allowances and this has the effect of collecting the right amount of tax owed for that item,
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