As part of HMRC’s agenda for Making Tax Digital, a dynamic coding system for PAYE has been in place since July 2017 but teething problems are causing some taxpayers issues.
Dynamic Coding was introduced to speed up the collection of tax via PAYE code adjustments. This is made possible by HMRC making use of real time information submissions, so that changes in earnings are recognised before the end of the tax year, which should help to reduce tax underpayments. However, it seems in some cases that adjustments to collect underpayments were made to both the 2017/18 and the 2018/19 PAYE codes in error.
Activate your PTA!
HMRC enables taxpayers to view the data they hold on them via their Personal Tax Account (PTA). This details all the information that the employer has reported and is where it is possible to first discover any errors. Activating your PTA enables you make changes to your PAYE code without having to speak to HMRC.
The main PAYE page on your personal tax account will allow you to view and amend a number of matters including:
Your income streams to identify which one HMRC lists as your primary source
You may change your estimated pay by selecting the ‘check your taxable income’ tab
You can look at your current tax code and its individual sections to check that each is correct
Should you receive a text from HMRC advising you that your tax code has been altered; you should immediately check your PTA to confirm that all of the components are correct. Should any not be accurate, it is important to advise HMRC immediately, as the impact of incorrect coding on your net pay could be substantial.
So what do you need to look out for? All taxpayers should check their tax codes are correct and should they not be, report it to HMRC immediately. We list here some of the problem areas and design features that are currently impacting taxpayers and employers alike.
So what are the main problems with Dynamic Coding?
Dynamic coding is driven by Pay Submissions which enable HMRC to estimate annual pay and then determine the allocation of allowances, the primary income source decisions and an employee’s PAYE tax code. Your employer uploads details of earnings each month using Payroll and any estimated pay changes can potentially trigger a change in your tax code.
Currently there are several main circumstances that will trigger a change in tax coding, but be aware that more will be rolled out as the system advances.
The current triggers are:
Responding to altered details in annual estimated pay reported by taxpayers
Responding to changes of benefits in kind from employers or taxpayers
Reacting to reports from taxpayers of allowances or tax reliefs changing
One of the biggest problems is with the dynamic coding’s interpretation of irregular amounts such as bonuses, commission payments or variable pay.
If a bonus is reported through the full payment submission system and at the same time another adjustment to the PAYE code is made, it is seen by HMRC as a permanent increase in salary. Should the estimated pay increase to over £100,000, personal allowances start to be reduced and will then cease if this figure exceeds £123,000.
Multiple FPS amends
If an employer makes several amendments to their submissions to HMRC in the same month, all of the changes will be listed on your personal tax account. The year to date figure that has been used to calculate the tax code will not agree to the FPS submissions shown, but it is the YTD figure that needs to be checked and not the individual entries.
Duplicated records can be the bane of all PAYE schemes and HMRC frequently see a change in personal data as a new source of income. To amend this error the taxpayer must contact HMRC direct.
Benefits in Kind
An employer is only required to report a benefit in kind after the tax year has ended, or report quarterly in the case of a car benefit. Should you wish to adjust your tax code to reflect a new or changed benefit in kind and avoid a tax underpayment, you need to tell HMRC via your PTA as soon as possible. This will trigger an in-year adjustment that will collect all the tax due for the months that are left in the tax year, by putting you on a non-cumulative code.
Joint UK and overseas tax obligations
If you are liable for foreign tax as well as UK tax under PAYE on the same earnings, HMRC may agree to reduce the UK tax to be collected under PAYE to avoid double taxation. However, dynamic coding is not coping well with the foreign tax credit, and is mistakenly ignoring the foreign tax adjustment. In these cases HMRC need to be contacted to resolve.
A benefit of dynamic coding is that if you overpay on your tax, you can now receive in-year refunds. However, payment of the refund is made to you by your employer, and not all have the cash flow to enable them to do this. To help these small employers HMRC has introduced an advance funding for refunds service.