Employees in the UK are entitled to a Personal Allowance. This is the amount of money an employee does not have to pay income tax on in a tax year. For the 2024/25 tax year, the personal allowance is £12 570.

To calculate this, an employee must have a tax code, which needs to be entered into the payroll software. This allows the system to determine the amount of tax to be deducted from their pay throughout the year.

The employee’s tax code and a starter declaration that needs to be used in the payroll software for new employees must be worked out. This information must be reported to HM Revenue and Customs (HMRC) using a Full Payment Submission (FPS) on or before your new starter’s first payday.

The tax code is worked out by using an employee’s P45. The code will usually be made up of several numbers and one letter, such as 1257L.

There are various tax codes available see the link below for other tax codes:

https://www.gov.uk/employee-tax-codes

The most common tax code for the 2024 to 2025 tax year is 1257L. It applies to most individuals who have a single job and no untaxed income, outstanding tax, or taxable benefits.

PAYSPACE APPLICATION:

On PaySpace this is reported under the component Pay Adjustment tax code”PAYADJ”, this component is calculated under the notes section and reduces the employee’s tax.

You need to update your employee’s tax code at the beginning of each new tax year. If the tax code changes mid-year, HM Revenue and Customs (HMRC) will notify you by email. You should update your payroll records promptly once you receive this notification.

Employee> Basic Information> Tax Profile> Tax Details.

      

Once the tax code is captured on the above screen, Pay Adjustment will be calculated on the employee. The Calculation of the Pay Adjustment is based on the tax code captured, see below a calculation example of Pay Adjustment on an employee with tax code 1257L: