Since July, this year, HM Revenue & Customs (HMRC) has been utilising its new system of dynamic coding, which permits in-year adjustments (IYAs) of a person’s tax code.
Under the new regime, codes can be adjusted by the Revenue to reflect sudden changes in an employee’s circumstances, as soon as HMRC becomes aware of the changes, rather than waiting until the following tax year when this is eventually reflected.
To make the IYAs HMRC relies on two important factors, estimated pay and trigger points, to compute the new code.
Estimated pay is effectively a person’s annualised year-to-date pay and this is used to perform the calculations necessary to arrive at the new tax code. The same procedure is used for employees paid monthly, but based on average monthly income.
However, the PAYE code will only be revised if employers advise HMRC of a trigger point, where an employee’s circumstances have changed.
This could include an individual altering their personal tax account, or an employer notifying the Revenue of a change, which will typically occur during a payroll report or via several different forms.
Bonuses and any one-off payments must be encompassed within an employee’s estimated income for the year. However, many are finding that existing payroll software does not contain a facility to tell HMRC that a payment is a one-off, which has in some cases led to the misinterpretation of payments.
In response, 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 result in needless restrictions of personal allowances or otherwise tax overpayment.
Carol George, Tax Manager at George Hay, commented: “It’s often the case that new systems implemented by HMRC run into teething problems and it’s true that these teething problems often have the greatest impact upon the taxpayer.
“We would urge taxpayers to be aware of the tax code that appears on any of their payslips throughout the year and to query any abnormalities as soon as possible to avoid paying more tax than they owe as well as any unexpected reductions in take home pay.”
Here at George Hay we understand that whether you’re employed or self-employed you face what can often be the difficult task of navigating and understanding the various tax rates and allowances that exist. The tax system, with its rules, regulations and everchanging goalposts, is complex, but we can help. We offer a range of personal taxation services to individuals; helping them to making tax savings where possible whilst also remaining compliant and fulfilling their obligations as a taxpayer. To find out more about our personal taxation services, click here.