PAYE with two jobs/pensions

If you have more than one job as an employee, you need to check that your PAYE code is correct for each job. This is because 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 as secondary (which are taxed in full at 20%). The same principle applies if you have more than one pension (or both an employment and pension).

But this system does not always mean that you pay the right amount of tax. This may be either due to a) a failure in the PAYE processes by employee, employer or HMRC or b) because of complications with your personal circumstances. For example:

Your personal allowance is being allocated against one job/pension but you actually have more than one job/pension:

• If HMRC are not aware that you have two employments, you may have been given the standard tax code for both jobs, and so be getting two tax free personal allowances (one against each income).  This would happen, for example, if you are under 65 and both jobs have a 747L code in 2011/12. You will not then have paid enough tax.
• If your total taxable employment (after deducting your personal allowance) is greater than £35,000 then you will be a higher rate taxpayer.  This means that deducting tax on the secondary employments at the basic rate will mean you do not pay enough tax. A tax code of DO could be issued by HMRC if all of the secondary income is to be taxed as the higher rate of 40% rather than at 20%.  The position will be more complicated if your secondary pension may need to be partially taxed at the basic and partially at the higher rates of tax. There is also a code D1 which charge which can be use to charge 50% additional rate tax on a second job

To avoid these situations, you should check that you have not been given your tax free pay in the PAYE code for both jobs. Also, make sure the tax office know about the second job (or pension). If you don’t make sure the situation is correct, it could take some time before HMRC spots the error and sends you a bill, during which time a large tax underpayment could have built up.

You are earning less than your tax free personal allowance in your main job:

If you have two jobs, but neither with income as large as your personal allowance (£7,475 for 2011/12), then the above method will not work.  This is because allocating your tax free personal allowance in full against one employment will leave some of that tax free amount unused.  You will then pay too much tax if a BR code is issued to your second employment/pension.

Example:

Josh has two jobs. He earns £100 per week in his main job and £90 per week in his second job. The tax code used for his first job is 747L – giving him £143.75 per week tax free pay (1/52^nd of £7,475). This means he is paying no tax on his first job. The tax code for his second job is BR – taxing all his earnings at 20% (£18) and giving him no tax free pay on that job.

Josh is missing out on £43.75 of tax free pay (£143.75 less the £100 used by the main job) each week and so is actually paying £8.75 too much tax each week (£90 less £43.75 leaves £46.25 taxable pay on the second job. This should be taxed at 20% meaning £9.25 tax is due). Since Josh is actually paying £18, he is overpaying tax by £8.75 per week because his personal allowance was allocated against his main job in full rather than being split between both jobs,

There are two possible solutions to this problem:

1)     You may ask your tax office to divide your personal allowance between two jobs. Only do this if your income from each job is predicable and stable. You also need to review the position regularly to ensure that the split continues to be appropriate.

2)     You may wait until the end of the tax year and ask your tax office for a refund. Send in the P60 forms from all your jobs with a letter asking for a refund. (Take copies of the P60s for your records).

You receive the 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. Because the Department of Work and Pensions do not operate PAYE, no tax can be deducted from your state pension through a BR code.

Instead of the method explained above, an estimate of your state pension is deducted from the tax free personal allowance available to your main employment or pension.  If you have any other employments or pensions these should be given the BR code in the normal manner. You may need to ask HMRC to explain the code to ensure that it is correct.