Using the right tax code for your employees is key to getting your payroll spot-on.
HM Revenue and Customs (HMRC) issue tax codes, or PAYE codes for individuals that are then passed to employers or pension providers to enable them to deduct the correct amount of tax from income or pension payments. In a situation where HMRC has insufficient information to be able to accurately issue a tax code for an individual, they’ll issue an emergency code until such time they have the information they need to issue the final code.
The majority of tax codes or PAYE codes feature a number and a letter. The number, multiplied by 10, refers to the amount of income that can be earned before tax comes into effect and the letter refers to the type, or category of allowance that is relevant. Employers will be familiar with most of the common codes, but two codes, 0T and NT often cause some confusion.
The tax, or PAYE code 0T is used in two different circumstances. Firstly it is used when allowances have already been used, or for some reason have been reduced to zero, which means that income is taxed at the relevant rates. The second instance where a 0T tax code might be used is if an individual has started a new job and doesn’t have a P45, or hasn’t completed a P46 before their first payday. The tax, or PAYE code NT is used when no tax should be taken from the individual’s income.
Where an employee or pension recipient is allocated an 0T tax code, the likelihood is that there is insufficient information to complete a
P46, or they are known to have already used their allowances. The effect of applying a 0T tax, or PAYE code is the same as applying a BR code. That’s to say that a flat rate deduction of 20% will be made for a basic rate taxpayer and for higher, or additional rate taxpayers the relevant rates will be 40 and 50% respectively. In order to make sure the right amount of tax is collected, it is important to establish if the information required to complete a P46 can be obtained and if not, to encourage anyone with a 0T tax code to contact HMRC in order to obtain an accurate tax code.
From the employer, or pension provider’s point of view, your duty is to apply the correct tax, or PAYE code for your employee or pension recipient. An NT tax code is a simple instruction from HMRC not to deduct tax at source for the individual concerned. There are several reasons why this may be the case. It could be, for example that the recipient of the income is of non-resident status or may be known to be declaring the relevant income in another way known, and agreed by HMRC, for example by including it in their self-employed accounts. When dealing with an NT tax code in your role as employer or pension provider, it is important to remember that although no tax is collectable on this income, it will normally still be liable for National Insurance contributions.
If you’re ever in doubt about the accuracy of a tax code, HMRC should be able to help, but failing that you can always contact us for help.