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BR Code

I am currently dealing with a PAYE underpayment case. I had always assumed that where an employee did not provide a P45 to a new employer that if a BR code was used it would automatically collect tax on earnings above the standard rate threshold at the higher rates. I am surprised to discover that the BR code only deducts standard rate tax from all earnings regardless of whether the amount is above the relevant threshold. In this case a consultant with monthly earnings in excess of 5 figures (excluding pence) each month. Being taxed at 20% on PAYE led to a very large underpayment over a three year period.

It seems such an obvious weakness in the PAYE system that I wonder why it was ever written into payroll systems in this way. Even the old manual tax tables didn't allow substantial underpayments to arise in this way. 

Presumably payroll systems have to be compliant with HMRC requirements why have HMRC not specified that payroll systems have checks built in to prevent potential underpayments arising from certain codes. 

Can anyone explain why payroll systems are written to allow this?

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By vince8
26th Sep 2012 16:42

Its a valid code

It works in the right circumstances. If HMRC had issued D0 no doubt the client would have objected to paying too much tax? So did he ask am I am paying enough tax on BR?

I suppose only some of his income was liable at 40% but HMRC tend to err on the side of the taxpayer when issuing codes then take the view (rightly or wrongly) that somebody with that level of earnings should be able to afford having to settle the underpayment. But once it drags on over 3 years the numbers are not manageable. Would code 0T have been a better option?

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By ACDWebb
26th Sep 2012 16:55

BR deducts tax at the

Basic Rate.

 

That this can lead to problems has been addressed by generally changing the code BR to 0T. The latter will do what you expect by allocating 0 (zero) personal allowances and then taxing income through the various Basic, Higher and Additional rates.

 

Payroll systems are written to do what HMRC instructs by the issue of tax codes, so as BR only ever takes the Basic Rate there is no need for the check by the system, which of course is not to say that HMRC ought not to have recognised with year end reconcilliations that in your case BR was wholly inadequate.

 

One might have hoped that the payroll department might have said to the consultant "you might like to check with HMRC as the code you are on does not look likely to collect the right tax" but they do not know the other circumstances so it's not really their job.

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By lisler
26th Sep 2012 19:38

so as BR only ever takes the Basic Rate

That's precisely my point, in what circumstances will a five figure income only be liable for tax at the basic rate?

I can't think of any situation where that level of income will only be liable for income tax at the basic rate. If that is correct why on earth would anyone program a computer to disregard what is a highly probable scenario.

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By ACDWebb
26th Sep 2012 20:07

Because

the computer has to work on what HMRC issues/instructs as a code.

Your scenario is HMRC's fault / stupid PAYE instructions not handling things sensibly by instructing a BR code in the circumstances quoted, not the software that must do what it is told. It might flag up the potential problem for the employee, but if the code BR is instructed then that is what the software & employer must use.

A more sensible option would be for the code to be used if P46 Part 1 Box C is ticked by the new employee to be 0T. That would make no difference to the lower paid employee, but catch your case.

Sorry we're going round in circles now.

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27th Sep 2012 09:23

Why didn't the consultant query the BR?

The employer is controlled by the PAYE legislation, it is the taxpayers duty to pay the correct tax.

 

This situation would have arisen with a manual system if no P45 and no P46 or box C ticked

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27th Sep 2012 10:05

Why 3 years

Surely with the 1st year end p35 being sent in you would expect HMRC to react to that and send an appropraite coding adjustment to the employer. Was a coding adjustment sent to the Employer? Did HMRC generate one.

But really BR is as stated by many earlier posters is a Basic Rate of tax deducted. Why are you surprised?.

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By ACDWebb
27th Sep 2012 10:18

You would expect,

Democratus wrote:

Surely with the 1st year end p35 being sent in you would expect HMRC to react to that and send an appropraite coding adjustment to the employer. Was a coding adjustment sent to the Employer? Did HMRC generate one.

and it should have been part of the year end recs, but of course HMRC didn't do them for a few years leading to the furore in the press, and endless discussion about whether ESC A19 applies or not
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By lisler
27th Sep 2012 14:48

Why am I surprised?

Because it is ridiculous that software should be specified to allow a situation like this to arise. I cannot think of any circumstances where a wage or salary in excess of twice the higher rate limit would only be subject to basic rate tax. Why on earth would a payroll package allow this situation to continue, common sense alone dictates that this is an improbable scenario. 

It's all well and good to say that the consultant (not a tax expert by the way) should realise that he was underpaying income tax, but I suspect that a lot of taxpayers under PAYE only look at the net pay figure and assume that the amounts taken for statutory deductions are correct. The same reasoning would apply to the payroll department, most will assume that the calculations are correct and not look at individual pay slips unless the payee raises a query. These are automated processes and in a large organisation there can be hundreds of employees.

I'm still of the mind that the payroll software should be written to prevent this scenario arising. And as I assume software packages are written to meet HMRC specifications then HMRC should accept responsibility for allowing this to occur. I can't think any half decent programmer couldn't build in a check to increase the rate of tax applied when wages or salaries are above a certain figure.  

 

 

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By vince8
27th Sep 2012 12:48

A N Z T

Those were the days!!!

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By Dido63
27th Sep 2012 21:32

ANZT

Indeed - except when a bored TO (nick-named Zorro) decides to Z everything then there's problems! Happy days.

 

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By ACDWebb
27th Sep 2012 15:36

Because

the software has to work to the code issued / instructed by HMRC. The code is BR and that means deduct tax at the Basic Rate.

Without wishing to shout IT IS NOT THE SOFTWARES FAULT IT IS HMRC's

You should actually be of a mind that HMRC did its job timeously and got the correct code issued so that the software could do its job.

 

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27th Sep 2012 15:55

I am rusty on payroll

... but wouldn't the BR code be automatically changed by the payroll operator at the start of the following tax year to the standard tax code?

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27th Sep 2012 16:05

@ShirleyM

Any week 1/Month1 settings are removed at the start of the new year, but otherwise only codes ending in L are changed.

http://www.hmrc.gov.uk/helpsheets/p9x.pdf

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27th Sep 2012 16:13

@WhichTyler

Thanks for reminding me. Yes, that does trigger a recollection of memory :)

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Some employees strain sympathy, to be honest

Firstly as others have said it is the duty of employers and payroll software developers to obey the law of the land. Tax codes are not a matter of choice, nor is the amount of tax deducted under a code a matter of choice. HMRC issues definitive instructions on how PAYE should be calculated and employers and software developers cannot deviate from that by 1p. The definition of code BR is to deduct tax at base rate, regardless of salary. Just because I can't imagine a reason why that would be correct for someone on £100k/year it doesn't follow that there is no reason for that so the overriding principle is that the specification must be observed.

The old manual tax tables would have given exactly the same result for code BR.

Secondly, in most ESC A19 cases I sympathise with the taxpayer who discovers a liability years later; particularly in complex multiple income cases it seems grossly unfair to hit people with demand for back-payment. But in the case of someone with the brainpower to earn £120k+ pa as a consultant in their single employment it beggars belief that they have so little awareness of their own income that they couldn't guess that PAYE of £24kpa wasn't sufficient and query it. You can be quite sure and certain that the opposite error of overpaying tax by £20k+/year would have been picked up on the instant by the employee in the first payslip. Others may have a different opinion, of course, and they've stated that here, and I recognise that is a matter of opinion.

Anyway, good luck with the appeal...

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By Old Greying Accountant
27th Sep 2012 21:37

Just suppose ...

... he makes significant private pension contributions and/or charitable donations then his BR band could extend into 6 figures!

As is statement repeatedly, the law tells us what code to use.

I, and many other savvy payroll operators, may suggest to a client he queries his code, or suggest to his employee they query their code, but you cannot as yet choose your own tax code - although agent self-serve may change this. 

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By lisler
27th Sep 2012 21:43

stretching things a bit

if someone did make enough pension contributions and/or charitable donations sufficient to extend their BR band into 6 figures I would have thought they would be knowledgeable enough about tax to make repayment claims if they overpaid.

I still think HMRC's specification is dumb to use the BR code enabling this situation to arise. Its even more ridiculous for HMRC to issue BR codes when a new employee doesn't supply a P45. Surely it would be more appropriate to use the emergency tax code. I just find it so hard to believe that HMRC think it is appropriate to use the BR code in the situation they state below:

 

Other tax codes and what they meanCodeReason for useBRIs used when all your income is taxed at the basic rate - currently 20 per cent (most commonly used for a second job or pension but may also be used if you’ve started a new job, don’t have a form P45 and haven’t completed a form P46 before your first pay day)D0Is used when all your income is taxed at the higher rate of tax - currently 40 per cent (most commonly used for a second job or pension)D1Is used when all your income is taxed at the additional rate of tax - currently 50 per cent (most commonly used for a second job or pension)NTIs used when no tax is to be taken from your income or pension

Why not use the following code which is emminently more sensible:

When you might be put on an emergency tax code

You might get an emergency tax code if:

you've started a new job and haven't got a P45 from your previous employer for the same tax yearyou've started your first job since the start of the tax year and haven't been receiving any taxable state benefits or a state or company pensionyou've started a new job but you've had another job or other jobs or received taxable state benefits during the yearyou've started a new job and were previously self-employedthere's been a change in your tax code during the year because, for example, you've started to get company benefits or the State Pension

 

 

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Not an improvement, in my opinion

lisler wrote:
Why not use the following code which is emminently more sensible:

When you might be put on an emergency tax code

You might get an emergency tax code if:

you've started a new job and haven't got a P45 from your previous employer for the same tax yearyou've started your first job since the start of the tax year and haven't been receiving any taxable state benefits or a state or company pensionyou've started a new job but you've had another job or other jobs or received taxable state benefits during the yearyou've started a new job and were previously self-employedthere's been a change in your tax code during the year because, for example, you've started to get company benefits or the State Pension

Your second condition is wrong since it would often result in an over deduction of tax. Much more sensible to allow single persons allowance cumulative in that case (as the P46 declaration already mandates)

Allowing a default to emergency code where neither P45 nor P46 is supplied would result in significant tax underpayment in the increasingly large number of cases where workers have multiple employments. Default to emergency would remove any incentive to complete a P46 declaration at all. Everyone ought to fill in a P46 if they don't have a P45 and the P46 declaration already generates a sensible tax code.

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By Old Greying Accountant
27th Sep 2012 23:03

May be ...

... at least you now realise it is HMRC not the software that is deficient.

My understanding is if an employer uses anything other than the prescribed tax code they may be laible for any short paid tax arising from such act.

If I am in any doubt I call HMRC and ask them to confirm the code in use.

 

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By ACDWebb
28th Sep 2012 08:30

The default for no P45 or P46 returned by employee

is now 0T.

That will go some way towards handling higher rate problems that arise with BR in your case.

I always had in mind that BR, or indeed 0T, should generally exercise the employees mind to do something to get their tax affairs up to date and stop overpaying tax. That would generally be the case for those at the bottom end of the income ladder. Clearly it is not at the other end of the scale, until of course it comes back to bite three years down the line.

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By lisler
28th Sep 2012 09:32

More sensible

I agree the use of (Zero) 0T is a more appropriate and better solution in these circumstances. My initial rant was aimed at the lack of an inbuilt system check to prevent this situation arising. HMRC allocate the codes and I would think it is reasonably foreseeable that the situation my client found themselves in could arise. I take your points that the taxpayer should have realised they were not having sufficient tax deducted and should have taken steps to minimise the shock when the inevitable tax bill would arrive. 

I still maintain that HMRC's tax code specification should include an inbuilt check to increase the rate of tax applied if gross income exceeds a specified amount.

Thanks to everyone for your views and opinions.

 

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28th Sep 2012 09:14

Like ACDWebb

I find people who are on BR band generally query it.

As most of the people I deal with are not high earners they are usually more concerned at paying too much tax, but none of them are particularly savvy when it comes to tax matters. I would think someone earning a vast amount of money would be savvy enough to at least query why they are on BR.

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05th Oct 2012 13:49

Three years?

The fact that this situation continued for 3 years is most surprising.

By 19th May following the end of the first tax year HMRC will have received the P35 for this consultant which would have immediately shown an anomoly.

I would have simply expected the HMRC system to flag the potential problem & immediately send out a notice requiring a tax return to be submitted.

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Indeed, but HMRC refuses to see it that way

SwanseaJack wrote:

The fact that this situation continued for 3 years is most surprising.

By 19th May following the end of the first tax year HMRC will have received the P35 for this consultant which would have immediately shown an anomoly.

I would have simply expected the HMRC system to flag the potential problem & immediately send out a notice requiring a tax return to be submitted.

Yes, it should have been picked up by the normal reconciliation processes of any modestly functional organisation.

But HMRC will accept no responsibility for its failure to check reasonableness of P35/P14 returns, however logical it seems to outsiders that they should have been used to reconcile basic PAYE/NI deductions.

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By ACDWebb
05th Oct 2012 14:14

Depends on your point of view really

Common sense and past practice would have suggested so, but with the change in systems @ HMRC they did not do the normal year end reconciliation, or rather put it off, for a couple of years. This then gave rise to all the furore in the press over the last couple of year and numerous threads and Tribunal cases about ESC A19 and its application, or not, to these sort of situations.

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05th Oct 2012 15:37

Not always the fault of HMRC

We have a case of a pensioner with code D0 (all at 40%) being applied by the pension company on the lower of his two occupational pensions.  He is now a basic rate taxpayer and HMRC have issued coding notices of BR (we know because the client has received his copy) to the pension company (the black cape one), but they have continued to apply D0.  HMRC have even told the client that he no longer needs to submit tax returns because it is all being handled under PAYE, but we keep having to submit a return to reclaim the inevitable overpayment of tax.

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