Dynamic tax coding

From 2 July 2017 HMRC has made the move into real time tax coding. With greater use of third party information from banks and building societies, plus RTI employer data, in-year adjustments have arrived.

The aim is that PAYE tax deductions will become more accurate, reducing year-end underpayments or overpayments of tax and subsequent adjustments. All this was previously done via the autumn P800 routine. Now HMRC intends to issue codes more frequently with 2017-18 becoming the accelerator year where the system tries to catch up with itself by collecting last year’s potential underpayments in year.

Code changes shouldn’t be issued more than monthly. This in itself will impact employers in terms of increased payroll adjustments and doubtless more queries from perplexed employees. An individual’s tax code will only be changed where there is a trigger to notify HMRC of a change in circumstance, such as the taxpayer updating their personal tax account or the employer filing a P46(car).

There is an awareness that speeding up collection could cause problems for some taxpayers. Hardship guidelines have been issued to enable taxpayers to ask for coding out to be spread over a longer timescale. Although this will depend on whether the underpayment is estimated or finalised, in some cases it may be possible to extend the timescale up to three years and there is a cap of a 50% deduction of relevant earnings. Taxpayers will need to contact HMRC to ask for extensions to the coding out process. We can of course help both employees and employers with this process – please contact us if you have any concerns.

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