HMRC has issued new instructions to agents and employers on the correct PAYE code to be used in a number of situations.

Relating to pensions, the amendments involve changing the PAYE tax code in situations where employees receive payments from their occupational pension scheme whilst continuing employment with their existing employer.

Presently, HMRC’s guidance requests employers to use the existing tax code against an individual’s employment income until a new code is issued. It also requires employers to use the same tax code against the pension payments. As a result it is possible that an employee receives more personal allowances, and in turn, underpays tax in the tax year.

To remedy this, the authorised tax code to be operated against the occupational pension receipts will be changed to code 0T (zero allowances), where the employee continues to be employed by the existing employer. A 0T code means that allowances have been used up or reduced to nil and your income is taxed at the relevant tax rates. However, at the moment it is not clear exactly how employers will be required to operate the 0T code in these circumstances.

The amended PAYE Regulations have yet to be published, but will be effective from 6 April 2011.