MTD for individuals: Dynamic coding
MTD for business has been dropped from the Finance Bill 2017, but Making Tax Digital for individuals starts in May 2017 with a project named: PAYE refresh. Kate Upcraft sets out what we know so far.
The new approach to PAYE coding will be launched on 31 May. I’ve not been able to establish why this is happening nearly at the end of month two, rather than from 6 April. Is it because of lack of IT resources?
Dynamic coding, or to give it it’s project name “PAYE refresh”, is part of the strand of MTD that was badged as “better use of information”. It refers to the use of third party information such as payroll data and bank interest, which is already submitted to HMRC.
That project was due to start last tax year, with the supply of bank and building society interest to HMRC, allowing the interest to be taxed via a coding adjustment rather than by self assessment. However, HMRC found that was not easy to match the first cut of this data to tax records (do many bank accounts have NINOs attached?).
With that project on hold, the MTD team turned to the other much more powerful source of third party information: RTI data from employers and agents.
We’ve been sending earnings data to HMRC under RTI, for over four years now (including the pilot year), yet it may surprise you to hear that it hasn’t been used in real time to effect PAYE coding changes.
In those four years since the introduction of RTI what has happened has been a very significant rise in end of year P800s. Last year the number of forms P800 issued reached 8m and HMRC says two thirds of those involved a tax repayment to taxpayers who had not earned enough over the tax year to pay tax.
One of the attractive features of dynamic coding is that those taxpayers won’t pay tax and then have to wait for an end of year refund. On that basis, this new approach to PAYE coding won’t, when taken in the round, bring forward tax revenues, but quite the opposite.
Other taxpayers will experience the negative affect of dynamic coding. They will see quicker and more significant tax deductions, as HMRC attempts to recover all the tax due by the end of the current tax year, rather than carrying some over to be coded out in a later year.
For example, when a company car is reported HMRC has in the past only coded out the benefit from the point of notification.
From 31 May, HMRC will try to recover all the tax from the point of receipt of the benefit by the end of the tax year. Equally, the forms P800 relating to 2016/17, expected in September 2017, will see any tax underpayments coded out immediately, rather than from the start of 2018/19.
As the 2015/16 underpayments are already coded out in 2017/18 this will be a double hit of tax underpayment recovery in one year.
The net effect of these changes is that tax agents and employers will receive more, and more frequent coding changes, although we have been promised no more than one code change per month for a taxpayer! HMRC has designed a briefing pack for employers, to explain the issues.
A granular breakdown of the PAYE code won’t be provided to the tax agent or employer, so we must encourage employees to activate and use their Personal Tax Account (PTA) to see the how the PAYE code is made-up. Over 8m people have already done that, but that still leaves another 33m to go.
Using the PTA
It’s much easier to access the PTA via the Government Gateway than by using the Verify service. The functionality is good in my experience, even if the data displayed is questionable at times.
An employee can query their tax code directly from their PTA, and can check the progress of the query. I’ve done that myself recently and got a reply by post (not sure why the reply can’t come back to the PTA to save money too?) within a couple of weeks. Actually, I got two copies of the letter which was a waste of postage. Employees can watch a video on the HMRC channel of You-tube which explains the PAYE changes.
If the taxpayer signed up to “go paperless” when they activated their PTA, they will get a text message to their phone (assuming their number is up to date) when a new PAYE code is allocated. Everyone else will continue to receive a P2 by post.
As well as keeping on top of tax codes, we also need to get taxpayers used to checking that the sources of income displayed in their PTA, on which the code should be based, are correct. For employment income, the data is displayed as soon as the FPS is received by HMRC. This may be before the payment date, so be aware of that if there is anything contentious in that period’s pay such as a bonus or redundancy pay.
I would also encourage all taxpayers to check their NI record. This is particularly important now that we all need between 10 and 35 qualifying years (fully paid up NI) to receive the single tier state pension. In January Rebecca Cave wrote about the parents who have not claimed Child Benefit to avoid the High Income Child Benefit Charge, and as a result have not received NI credits for years when they have been out of work due to childcare responsibilities. Those parents will receive a lower state pension as a result.