Employee PAYE Tax Codes: Guidance for Employers

BLOG23rd Jun 2017

Employers or their outsourced payroll providers will often get queries from employees about the level of tax they are paying and their PAYE codes at the start of a new tax year and throughout. Employers have a statutory obligation to operate the PAYE code issued by HMRC for an employee and do not receive any detail of what is included in the code. Although it is the employee’s responsibility to check their PAYE code, for many employers simply telling their staff to contact HMRC often leaves employees feeling unsupported and frustrated.

A number of factors are brought into play to make up a PAYE code. Some common issues to consider when explaining PAYE codes to employees are:

  • There are often adjustments going through employees PAYE codes to collect additional tax in relation to taxable benefits or underpayments for prior years.
  • 2017/18 is the first year the Scottish rate of income tax varies from the rest of the UK. A Scottish taxpayer with prefix ‘S’ at the start of their PAYE code will start to pay higher rate tax earlier compared to the rest of the UK and as a result their take home pay may be slightly less.
  • The maximum amount of tax that can be deducted each pay period is 50% of pay and this now applies to all codes and not just ‘K’ codes, as was previously the case. This may come into play where an employee has an unusually large payment one pay period which, when looking at the cumulative position, would result in a larger than 50% deduction. However, with this rule, the deduction should be restricted to 50%, regardless of the PAYE code.
  • If an employee’s PAYE code has W1 or M1 at the end for week 1 or month 1, this is an emergency code and is usually issued when HMRC are looking to adjust the amount of tax collected from an employee. These codes are non-cumulative codes meaning the employee is only taxed on what they are paid that pay period ignoring previous pay and tax.  This could result in the employee having more tax to pay in that pay period.
  • Employees with a second job will normally have a BR, D0 or D1 code applied to their second job with any tax-free allowance being allocated to their primary job. The employee should confirm to HMRC which employment is their primary job.

If the employee thinks their PAYE code is wrong, they should get in touch with HMRC. There are now a number of ways to contact HMRC regarding PAYE codes, employees can:

In our experience if employers/payroll providers can give employees some general guidance as above, employees will feel more supported and better placed to manage their own PAYE codes, which should ultimately reduce further employee queries.

If you have any queries on your responsibility as an employer with regard to PAYE codes or any other payroll matters, please don’t hesitate to contact us.

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