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9.4. PAYE codes (a)
An employee’s PAYE code indicates the amount of tax free pay he is entitled to and is notified
to the employee and his employer by HMRC. This will allow the employer to deduct the correct
amount of tax from the employee
(b)
The PAYE code will include the employee’s personal allowance and any allowable deductions
and be restricted by various taxable amounts.
It is calculated as follows:
(c)
To obtain the code number the last figure is removed and replaced with a letter
L
- code for PA
K
- increases taxable pay instead of reducing it (benefits exceed allowances) with no tax
free allowances
BR
- tax will be deducted at the basic rate
NT
- no tax is to be deducted
Example 7 Annabel earns £20,000 pa. She has annual benefits of £440 and her unpaid employment income tax
for 2022/23 was £132.
Annabel pays income tax at the basic rate of 20%
Calculate Annabel’s tax code for 2022/23. £ £ Allowances: Personal allowance
X
Personal pension contributions - higher rate relief
X
Expense deductions
X
X
Less Deductions, Benefits
X
Untaxed income
X
Tax under payments b/f (grossed up)
×
100⁄20
×
100⁄40
×
100⁄45 for
basic/higher/additional rate taxpayers
X
(X)
Allowance to set against pay
X
90
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