In July 2017, HMRC utilised their new dynamic coding system, with an aim to retrieve underpaid tax quicker and to change the ways in which employers deduct tax from employee pay, all as part of its Making Tax Digital (MTD) project. It allows the Revenue to make in-year adjustments (IYAs) to an individual’s tax code.
The new procedure
The new procedure allows codes to be adjusted by the Revenue as soon as they become aware of the changes to reflect sudden alterations in an employee’s circumstances. For HMRC to make IYAs to the new tax code, two concepts are relied on, estimated pay and trigger points.
What is estimated pay?
Estimated pay is an individual’s annualised year to date pay used to calculate a new tax code. The same procedure is used for employees that are paid on a monthly basis, however is based on average monthly income.
A trigger point
An individual’s PAYE code can only be amended if employers notify the Revenue of a trigger point, where the circumstances of an individual have altered. This may include an individual changing their personal tax account, or the employer notifying HMRC of the change, for example through payroll reports.
The issues raised
It is imperative that Bonuses and one-off payments are included in an employee’s estimated income for the year. However, the difficulties arising are that current payroll software is not capable of informing HMRC that a payment is a one-off, this has led to the misinterpretation of payments.
The Institute of Chartered Accountants in England and Wales (ICAEW) is warning employees and employers to check their tax code where a bonus or one-off payment has been made to ensure it doesn’t cause unwarranted restrictions of personal allowances or overpayments of tax.
Inform HMRC or not?
Currently, individuals are not obligated to notify HMRC about changes to your circumstances during a tax year that might affect your tax liability.
A company provides their employee with a taxable perk taking effect from 1 October 2017. The employee does not need to tell HMRC until they complete their self-assessment tax return. However HMRC must be informed if this perk is a company car.
If a change in your circumstances results in an increase to your tax bill, you are naturally likely to delay informing HMRC until it is vital. However, tax will be payable eventually.
Will the new system work?
It is viewed that the new system is likely to be ineffective in the short term as HMRC still heavily relies on you informing them of changes in your taxable income. However, this is subject to you promptly telling them about changes.
HMRC is piloting systems to help them obtain data about employee taxable income directly from banks and other organisations, however until then, control remains with the individual.
For further information on HMRC’s new coding system, please contact Paul Windmill at firstname.lastname@example.org or on 01923 224411.