The aim of dynamic coding is to reduce the number of P800 computations produced after the tax year end. These P800 forms are necessary because, despite the operation of PAYE, there are under or overpayments of tax.
Dynamic coding aims to use the increased information provided by taxpayers or their employers within the tax year to recalculate the employee’s “estimated pay”. Then if necessary, amend the current tax code in use to achieve a more accurate deduction of tax.
Until April 2019, trigger events included the following:
Full Payment Submission (FPS) with a start date for an employee or pensioner: a recalculation is based on the number of days to the end of the tax year and the first reported pay figure.
FPS with a leave date: based on the final FPS year to date figures.
Benefit in kind reported by the employee or employer.
Allowance or relief reported by the taxpayer.
In addition, there is a bulk run of revised PAYE codes in January before the annual coding exercise for the next tax year, which is undertaken for employees but not for pensioners. This uses the year-to-date figures on the FPS prior to the chosen date.
From April 2019, HMRC has begun a “controlled go live” of a new coding trigger.
This involves comparing the tax code reported for an employee on the FPS with the code HMRC believes it has issued for the taxpayer, as shown on the National Insurance and PAYE Service (NPS). Where the codes don’t match and the employer hasn’t implemented the code issued more than 60 days ago, the HMRC computer will reissue the PAYE code to the employer.
When comparing tax codes, the HMRC computer doesn’t take into account the suffix (L, T, M etc) or whether the code is cumulative or non-cumulative, ie WK1/MTH1.
If the code hasn’t been used by the employer, the computer will recalculate to see if the HMRC held code is still appropriate. If the HMRC held code is still appropriate, it will be reissued and if not, HMRC will issue a brand new PAYE code to both the employee and employer.
During the control phase, which is now in month two, HMRC has issued new codes to the first 30,000 mismatches identified. It is also working with selected employers to sense-check for any unexpected scenarios.
HMRC expects the volumes of reissued codes will ramp up in June, with the full “go live” of this project to be confirmed at a later date.
If there are 500,000 PAYE codes currently ignored by employers, this prompts a number of questions:
Are employers and agents downloading the employees’ tax codes before each payroll run?
If the employer still receives paper codes, is the correct employer address and contact details held on the HMRC record for that employer?
Is the employer sure all codes are being received?
If the employer is downloading codes online (which all decent payroll software should do), does the software alert any mismatches, such as employee name or NI number, so those points can be followed up with HMRC?
New starter process
HMRC has identified that 500,000 new employees are being defaulted to an “undeclared” starter declaration. This means the employee didn’t tick one of the following boxes on the starter checklist under “employee statement”:
A: This is my first job since 6 April and I’ve not been receiving taxable state benefits or pension
B: This is now my only job but since 6 April I’ve had another job or received taxable state benefits or pension
C: As well as my new job, I have another job or receive a state or occupational pension.
In this situation, the employer defaults the new employee to tax code 0T/1 and supplies statement C.
Why does this happen?
The operation of the starter checklist is not optional; it is mandatory for all new starters even if they have a form P45. However, the new starter checklist is baffling for some employees, so they leave the employee statement box blank hoping the employer will know what to do!
Some employers think rather than getting a new starter to 'fill in a form’ they put the employee on 0T/1 until HMRC look at the taxpayer's record after the first FPS is submitted. This leads to the new employee receiving no personal allowance at all and overpaying tax.
HMRC has begun to visit the top 100 offending employers to review their new starter process to ensure that it is legally compliant.