PAYE Coding Notices

Around this time of year, employees will normally be sent a notice of coding (Form P2) by HMRC. Your employer is told your code number but not how it has been calculated. This is important because it means that the employer is not able to check if a code is correct. As an employee, it is up to you to check that the code is correct!

Out-of date notices
It is a common occurrence for incorrect or out of date coding notices to be issued. If this happens, your employer may be deducting too much tax from you or too little. If this is identified at a later date, you could be the subject of a tax enquiry. It is therefore extremely important that you check all changes to your tax code when you receive a coding notice from HMRC.

Personal allowance
Particular attention should be given as to whether you have been given the correct personal allowance. If you are over 65 you are entitled to an enhanced allowance.

Benefits in Kind
Car and fuel benefits, especially if your car was changed during the year, and any other benefits in kind which may have ceased in the previous year are often incorrectly adjusted on the coding notice.

More than one employment/ pension
Ensure that HMRC are aware of second jobs (or pensions) so that a correct PAYE code is allocated to each. The system is designed to treat one job as your main employment (against which your personal allowances will be given in full) and the other jobs/ pensions as secondary (taxed in full at 20%).

If HMRC are not aware that you have two employments, you may have been given the standard tax code for both jobs and thus be getting two tax free personal allowances (one against each income). You will not then have paid enough tax. If you don’t make sure the tax codes are correct, it may take some time before HMRC spot the error and send you a bill for money you have already spent!

State Pension
If you receive the state pension, and either work or have a separate occupational or private pension then your tax code will be quite complex as no tax is deducted from your State Pension. Your tax codes for your other income may need to be adjusted for the state Pension to ensure that you do not have a tax bill arising.

Other Income
If you are in receipt of other income which is received gross of tax, such as rental income, HMRC may include a deduction in your tax code to collect the tax due from this income from your salary or pension. This effectively means you would be paying the tax early. You can therefore request that this deduction is not included in your tax code and request to pay the tax becoming due through your self assessment return.

A simple phone call to HMRC is often sufficient to remedy the situation. However, if in any doubt, you should seek professional advice.

Áine Devine