MTD for individuals: Dynamic coding

Dynamic coding for PAYE explained
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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.

New approach

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.

RTI data

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.

More tax

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.

Net effect

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.

Check sources

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.

Check NIC

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.

About Kate Upcraft

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

Replies

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By birdman
05th May 2017 10:45

Will they be cross-referencing for SA records? I get fed up with P800 refunds for years already clear under SA, so you have to advise client not to cash payable orders, or explain why they need to repay their windfall!

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to birdman
05th May 2017 15:36

HMRC said they sorted this problem out about 10 years ago. I've not experienced this problem for a long time.

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to birdman
08th May 2017 10:40

We have had this issue several times and for our client's its generally where the NI number isn't linked to their SA record for some reason.
They have had a temp NI number linked to SA then their real NI number isn't linked to an SA record meaning that refunds are issued when they should be dealt with through SA.

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05th May 2017 11:31

"An employee can query their tax code directly from their PTA".
1. How does an individual holding power of attorney for an incapacitated pensioner do this? I haven't seen any relevant guidance.
2. What about my many clients who want to leave their tax affairs to their agent?
3. Presumably the change means that the agent for SA taxpayers will no longer be able to access coding notices with detailed workings. Please tell me I'm wrong.

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to leon0001
05th May 2017 15:40

1. You apply for a user ID.
2. This was supposed to be one of the tools that agents could use through Agent Services. But I guess it is now abandoned because it will be in MTD for agents which will be about 2025 I guess.
3. I hope not - but you're probably right. But I can only access detailed coding notices for about half my clients currently.

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05th May 2017 11:40

Kate Upcraft wrote:

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.

I will have no problem with frequent tax code changes when and if payroll software can be informed of such changes automatically by HMRC so that we do not need to do this manually. Does any payroll software yet do this?
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By birdman
to charliecarne
05th May 2017 11:44

charliecarne wrote:

Kate Upcraft wrote:
I will have no problem with frequent tax code changes when and if payroll software can be informed of such changes automatically by HMRC so that we do not need to do this manually. Does any payroll software yet do this?

With Brightpay you just click on coding changes when running the payroll, and it downloads and updates them as long as you are registered as agent. Is that what you were after Charlie?

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By Sue01
to birdman
05th May 2017 12:56

It's the same with Moneysoft you just select to Download PAYE notices.

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to Sue01
05th May 2017 15:55

But I find it very hit-and-miss. Sometimes the employer tells me the employee has told them of a change but I've not received anything through the software so I phone HMRC and sure enough a change has been made. Anyone else have this problem?

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to kevinringer
05th May 2017 23:11

Same with IRIS payroll products, when you open the client it polls for coding notices and updates as appropriate, the problem is they are invariably wrong so I don't want to automatically update if I know will lead to an employee ending year with underpayment.

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to birdman
21st May 2017 10:28

Thank you, Birdman. That sounds good, though I note from another answer here that it may be hit and miss with some software. If we can rely on payroll software doing this accurately (such that it doesn't require additional, manual, time-consuming checks), then I have no problem with HMRC changing the code as often as they like.

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to charliecarne
22nd May 2017 06:33

One of the problems with the online codes is they don't automatically appear in the employee record. As far as I'm aware all software requires the user to tell the software to check for new codes. MoneySoft Payroll Manager requires this to be done within each individual employer. I guess others are the same. This routines adds a bit of time when processing each payroll and some staff forget to do it every time. I agree Charlie that there's no problem HMRC changing codes as much as they like if it is a seemless 100% reliable process. RTI has been with use for several years but this process is still not up to speed.

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05th May 2017 11:40

Kate,

A thought provoking article. Do you have any information on HMRC's progress to provide tax software providers with API access to client's PTAs?

As I understand the current state of affairs, agents cannot link direct to a client's PTA.

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to BobEdwardsLandmark
05th May 2017 15:58

Most agent software already has the APIs built in for 2016-17 P60, P11D, state benefits, C2NICs and MA but HMRC aren't switching on the first three until after the P11D deadline. Most software can't switch on APIs selectively so some vendors are waiting until all are on before switching on the APIs. I don't think there are APIs for coding.

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06th May 2017 15:44

thanks for the useful update Kevin re SA agent APIs. As I'm only involved with the employer side it's good to know industry is ready even if HMRC aren't quite there! They expected all payroll systems to be API enabled for 17/18 to view business tax accounts (BTA) but I'm not aware who has been able to offer that yet, unless anyone has payroll software that can? It seems that there was an assumption that would be on offer commercially so as a result HMRC have said agents won't see the apprenticeship levy for some months and employers not straight away on their BTAs as per Agent Update 59
'Employer clients will be able to see their apprenticeship levy data using their Business Tax Account after April. Agents will be able to view their clients’ apprenticeship levy data through Agent Services from late summer 2017.'
It's true that most payroll software can download tax codes automatically so the increased volume isn't a burden but I do share your concerns about accuracy.

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