PAYE: Cracking the code

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Dynamic coding was launched in July 2017, but its impact will be felt by even more taxpayers as HMRC issues tax codes for 2018/19. What is there to look out for?

More data sources

The ‘dynamic’ part of dynamic coding refers to using more data sources in-year to ensure PAYE does the best possible job when collecting the right amount of tax within the tax year. HMRC changes its estimate of what will be earned (so-called estimated pay) when the taxpayer tells it about changes in income or it receives information about benefits in kind.

When estimated pay changes, so does the tax code, if that is what is needed to collect the right tax in-year. However, HMRC won’t action in-year changes from January to March as there are too few months left in the tax year to collect a whole year’s worth of tax. In that situation, HMRC will roll an underpayment forward to 2018/19 as had been the case before dynamic coding.

Vital to visit PTA

We must encourage employees to activate their personal tax account (PTA) so they can check if their estimated pay is accurate. It won't be correct if any income sources, allowances or benefits in kind are missing or wrong.

The vast majority of the UK’s 40 million taxpayers still assume that the PAYE code issued by HMRC is always correct; the employer will receive that combination of letters and numbers and hey presto all will be well by 5 April each year.

The large number of P800s issued each year – two million were underpaid, and 4.7 million overpaid for 2016/17, are testament to the fact that PAYE can’t always get it right. This is not surprising given the complexities of the labour market today, so taxpayers may have multiple income sources and a myriad of allowances and reliefs to apportion.

Employers and tax agents will often say to me: “Why do we need to cascade information about the PTA? We are just the employer and our role is to act on HMRC instructions”.

If the employee only finds out about an incorrect PAYE code when they open their payslip they will almost certainly blame the employer, who in turn blames the tax agent and asks for support (non-chargeable time) to sort things out.

Cascading information about dynamic coding to employees will help those employees take ownership for what HMRC has done with the data that they, or the employer, have provided. The employee may even be empowered to correct their tax code through their PTA when central government systems have misinterpreted the data. There is a friendly video to watch which helps explain the PTA to individuals.

Teething problems

Sadly, there are some wrinkles in the dynamic coding process as you would expect with any new system, which can lead HMRC to make incorrect assumptions.

Say an employer or employee reports a change in benefits in kind and this coincides with a spike in earnings, perhaps due to commission or a bonus being paid that pay period. In that case, HMRC will alter the code to collect all the tax on the new benefit in the months left before the end of tax year. But HMRC will also assume the spike in earnings is a permanent salary increase, and extrapolate the ‘pay spike’ as the new earnings up to the end of the year. This can happen, for example, when a bonus is paid in August which coincides with the P11D being processed. If employers know this can happen, agents can encourage employers to remind employees to check their PTA at the appropriate time, so the estimated pay can be reduced to the appropriate value.

Annual coding run

Right now HMRC is using the estimated pay, benefits and reliefs shown on the taxpayer’s PTA in mid-January, to inform their PAYE code for 2018/19. As codes begin to be issued to employees and employers for the 2018/19, it is important that individuals look out for the following coding oddities:

  • BR code operated against their main income source, rather than a personal allowance of £11,850. 
  • Pension tax relief is missing
  • Income sources are still showing that are no longer live
  • Duplicated employments (they do happen despite the best efforts of agents, employers and HMRC)
  • Scottish taxpayers without ‘S’ prefix codes
  • Marriage allowance election is not shown
  • Benefits in kind missing, or included when no longer provided, or incorrect as the benefit is now taxed via the payroll 

About Kate Upcraft

Kate is a technical writer, editor and lecturer on all aspects of employing people - primarily payroll and HR matters.

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13th Feb 2018 12:43

Interesting read. So if 6.7million codes were wrong in 2016/17, how many were actually issued?

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to alisonis
14th Feb 2018 10:14

I'd guess at 6.7m +1

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14th Feb 2018 10:52

Some of us aren't being allowed into our own wretched digital Personal Tax Accounts, let alone those of our clients.
And where will I find any guidance as to how I am supposed to gain access to the PTA of a person whose tax I deal with under a Lasting Power of Attorney.

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14th Feb 2018 10:59

So the large number of P800s issued are a testament to the fact that PAYE doesn't always get it right . To be precise , I make that 16.75% - according to the underpayments / overpayments scenario.
But the point has been missed regarding these so called corrective HMRC calculations aka P800.
Has anyone seen a P800 which accurately reflects the true position for the year ? Just another administrative burden within HMRC's continual creaking system.
As for DIEMANIC coding and encouraging employees to visiting their PTA , there's as much hope here as getting more parental influence in the local school.

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14th Feb 2018 11:11

Actually this sounds very similar to the old system. Assuming that one-off payments are recurring is at best lazy and at worst negligent. HMRC, never knowingly correct! The whole point of PAYE is to ensure that for the vast majority it collects all and only the tax due. As the system gets more complex this becomes harder. Blame the MPs.

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By tedbuck
14th Feb 2018 11:44

The trouble with HMRC is that the coding process isn't connected to a human brain anywhere.
When GOGO decided to stop the deduction of tax from interest those with lots of interest being received automatically became 31st January taxpayers even if they weren't before. Did HMRC think about this? No, of course not, so lots of elderly people found themselves with unexpected tax bills. Not much fun at 85 plus.
They also ceased coding foreign pensions, or so they told me, so one 9o year old client was presented with a bill for a couple of thousand which she wasn't expecting. A great disincentive to saving and trying not to live off the state. But I suppose with Mr Corbyn's money tree we shouldn't bother to look after ourselves as he will do it for us. Only problem is who is going to pay for it? I can't see it being the Momentum supporters as, presumably, they aren't employed.

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By NYB
14th Feb 2018 12:13

Why should everyone have to check their codes. For one thing unless you are in the accountancy /payroll business one has little idea as to how coding works. And even with payroll experience I find reading my PTA (when I have managed to log in) is sometimes beyond me.
Why do HMRC constantly put the onus on everyone but themselves.
The whole system is not fit for purpose

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14th Feb 2018 12:16

Are you sure that's Kate Upton?

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14th Feb 2018 16:37

We had a case last week where a client's Tax Code was altered in January to a K code as HMRC at the trigger point assumed she would go over £100k by 5 April. they took all but £3,250 personal allowance off her. It devastated her January payslip. In fact she was on SMP having come off full salary, generous employer, in November and gone onto SMP in December. It left her well short of covering her mortgage never mind feeding her baby. A lot of colleagues suffered a similar fate.
So HMRC are indeed implementing dynamic coding between January and March contrary to your assertion Kate.
We calculated her actual gross, including SMP, until 5th April and called the Agents Helpline who asked us for our calculation and amended the code back to 1130L

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16th Feb 2018 17:55

A slight aside from Tax Codes - my son has just been issued with an Annual Tax Summary 2016-17, which states 'Your tax & NICs - £6154.22. This is 20% of your taxable income. For every £1 of income, you paid 20p in Income Tax and NICs'.
This is not accurate as we all know that the NIC contribution for employees was 12% for 2016-17. Very misleading for 'ordinary' people.

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