PAYE codes: Emerging problems
Kate Upcraft has discovered how some of the design features of dynamic coding are impacting taxpayers, employers and tax agents.
It’s now two months since HMRC rolled out dynamic coding for PAYE, using both taxpayer and employer reported data much more quickly to effect changes in employee’s tax codes.
Embrace your PTA!
The Personal Tax Account (PTA) is the main vehicle through which HMRC gives taxpayers a view of what data it is holding about them. I choose these words carefully as it is not (despite what HMRC helpline staff may tell employees) necessarily just the information which the employer has reported.
We must encourage all employees and pensioners to activate their PTA and lead by example. It’s surprising how many finance professionals I meet who have not activated their own PTA.
Check and react
Dynamic coding is built around the concept of Estimated Pay (Est Pay) which drives the allocation of allowances, decisions about primary income sources and ultimately, therefore, an employee’s PAYE tax code. As employers or agents submit FPSs the Est Pay changes, and this can, in turn, lead to a revised code.
The main landing page for PAYE within your personal tax account allows you to:
- view your income streams and see which one HMRC considers your primary source;
- amend your estimated pay by selecting the ‘check your taxable income tab’; and
- look at your current tax code and its constituent parts and inform HMRC if allowances or reliefs are incorrect.
You need to check all of these elements to see that you agree with assumptions that have been made by HMRC. If you get a text message from HMRC saying your estimated pay has been amended then react to it immediately, as the impact of dynamic coding on your net pay can be significant as Sarah Bradford outlined.
The main trigger events which have been deployed so far to change PAYE codes under dynamic coding have been:
- reacting to changes in annualised estimated pay reported by taxpayers;
- reacting to reports of benefits in kind from employers (P11D, P46(car)) or from taxpayers;
- reacting to reports from taxpayers of allowances/reliefs changing.
The most recent HMRC agent webinar on dynamic coding said that another trigger would be deployed in November around fluctuations in pay reported by employers, but there is no detail on this yet.
What problems have emerged so far?
The main problems involve the interpretation of irregular amounts such as bonuses, commission or variable pay.
The Full Payment Submission (FPS) simply reports total taxable pay for both the current period and YTD. If those figures increase, and another trigger has caused HMRC to review the code at the same time, for example, a bonus in August at the same time as a P11D is processed, HMRC extrapolate that to mean there has been a permanent uplift to salary.
Where this higher Est Pay takes an employee over £100,000, personal allowances start to be tapered away and those allowances are fully removed if Est Pay is £123,000 or more.
|Action: tell employees about this feature of dynamic coding. If they are notified about a tax code change, they can go into the PTA and reduce their Est Pay as long as they don’t try to reduce it below the YTD figure that has been reported by their employer so far. This will restore their allowances. They can also speak to HMRC directly on 0300 200 3300.|
Employees should be aware that the PTA displays all the FPS received, not just the latest YTD figures. However, the total at the bottom of the breakdown screens is derived from other HMRC sources and is a YTD figure.
If the employer sends several FPSs in a month as amendments are made, all these will be displayed, and they won't add up to the YTD which has been used to calculate the code.
|Action: if you regularly send more than one FPS for a tax period, warn employees that the YTD figure is what they need to check on their PTA, not the individual submissions. There is no warning about this on the breakdown screen.|
We still have the spectre of duplicated records hanging over all PAYE schemes. Despite HMRC’s assertions that they have finessed RTI to stop their systems interpreting a change in personal data as a new source of income, it still happens far too regularly.
For example, I have been attempting to correct the code of an employee, where the insertion of an employee number for pension purposes in July led HMRC to assume he had two employments with the same employer, and consequently an incorrect reallocation of allowances.
I have been told by both the employer helpline and the personal tax helpline that the taxpayer cannot remove a duplicated employment through the PTA, this must be done by a phone call from the taxpayer.
|Action: where this message appears on the screen: “If there is an employer or pension that is missing, has ended or is duplicated, tell us what to change”, the taxpayer must call HMRC.|
HMRC staff on some of the dynamic coding webinars have told agents that it is an employer’s responsibility to inform HMRC as soon as a new benefit in kind is provided – it isn’t.
Employers report benefits in kind via the P11D after tax year end and quarterly on the P46(car) in the case of new company cars and fuel benefit. If an employee wants their tax code adjusted to reflect a benefit in kind they need to tell HMRC via their PTA. This will trigger an in-year adjustment that will collect all the tax due for 2017/18 in the months that are left in the year by putting the employee on a non-cumulative code.
So, the later in the tax year the benefit is reported, the more significant the impact of informing HMRC.
|Action: Ensure employees understand the impact if they choose to report a new benefit in kind. If the tax due after the PAYE code is altered is less than £15 for the next tax month, the code will be issued cumulatively – if it’s £15 or more the code will be issued non-cumulatively. If the taxpayer would prefer the code is operated cumulatively so they pay all the underpayment in the next pay period, they need to call HMRC to request this.|
|Action: If the employer is payrolling benefits, then the employee must not tell HMRC about the benefit as it has already been taxed at source. There is no warning message on the PTA about reporting payrolled benefits.|
Employees who are liable to foreign tax as well as UK tax under PAYE on the same earnings can be relieved of this double charge to tax by applying to HMRC to use Appendix 5 “net of foreign tax credit relief”. It appears that dynamic coding is not dealing with the foreign tax credit and is calculating an in-year adjustment equal to the foreign tax that has already been paid.
|Action: Affected employers should discuss this urgently with their HMRC contact or tax agent, and warn the affected employees.|
One of the selling features of dynamic coding was that taxpayers who overpay tax will now get refunds in-year. However, a micro-employer (particularly care and support employers with a fixed local authority budget) will not be able to fund these tax refunds as they have insufficient other tax and NI to offset them against.
|Action: HMRC has introduced an advanced funding for refunds service that is supposed to work like advanced funding for statutory payments.|
What can agents do?
Tax agents can’t access their client’s PTA even if they have authorisation to act, so any changes the client asks their agent to pursue must be done by telephone. HMRC says they are working on giving agents a view function for the PTA, but not an update facility and no timescale has been given for that enhancement.
We are learning more about dynamic coding all the time, but mainly through customer feedback as official guidance is still limited. I’m sure we’ll be returning to this topic regularly over the coming months.