We all know that having a correct tax code is vital to ensure that you are paying, only, the correct amount of tax through the PAYE system. With an increasingly diverse range of employment situations, HMRC has had to adapt their system of coding to try and account for every eventuality.
They intend that Personal Tax Accounts will give individual taxpayers the opportunity to check their tax status and alter details as their circumstances change. This means that it might be handy to know a bit about their new dynamic coding system.
What is dynamic coding?
Dynamic coding means that HMRC will use more sources of information to calculate your tax code. The theory is that using more data will make the PAYE tax collecting system more accurate. The calculation is largely based on your ‘estimated pay’ figure. Rather unsurprisingly, this is an estimate of your earnings inclusive of all income streams, allowances and benefits in kind. If your circumstances change, this estimated pay figure changes and this alters your tax code accordingly. The whole aim is to collect the correct amount of tax in any given tax year. HMRC don’t want people under or over paying, because then another process is triggered.
If your employment situation changes during the months of January to March, your code is not changed because there are not enough months left in the tax year. Any alterations are carried forward to the next financial year.
Is this why I’ve got a Personal Tax Account?
It is certainly one of the reasons that you need to open your Personal Tax Account. HMRC want as many of their services to be online as possible and the Personal Tax Account (PTA) is the way they envisage all taxpayers accessing and checking their tax information. You can see your estimated pay figure in your PTA and, if it is wrong, work out which part of the equation isn’t adding up. You can check your benefits in kind, allowances and your income streams. This way a regular check can stop coding errors and prevent a drawn out rectification process.
HMRC makes mistakes too…
With 40million taxpayers to take care of, it’s not surprising that HMRC sometimes get PAYE tax codes wrong. Just because they are a government body doesn’t mean that we shouldn’t keep an eye on our tax position ourselves. It’s not assuming that something’s wrong, it’s just avoiding the assumption that everything’s right.
For example, in 2016-17 tax year’s P800s, 4.7million had overpaid and 2million taxpayers had underpaid. This is partly due to the increasingly complex employment situations of many taxpayers with multiple incomes and assorted work benefits and allowances to consider.
What is the current situation with dynamic coding and my tax code?
Currently, HMRC are working out your 2018/19 tax codes based on your financial information from mid-January (2018), as it’s shown in your PTA. When you get sent your new one, as an employee and an employer, you should run through this checklist to ensure the accuracy of your code:
- Missing pension tax relief
- Showing a source of income that no longer exists
- ‘S’ prefix in Scottish taxpayers codes
- Missing marriage allowance choice
- BR code worked out according to your main income, instead of £11,850 personal allowance
- Benefits in kind that are included when you no longer get them, or are taxed through payroll
- Missing benefits in kind
- Employment that has been replicated (shows you work the same job twice)
Employers and tax agents
If you are an employer or tax agent, it is simply in your best interest to promote awareness of Personal Tax Accounts and how important it is that your employees have the correct tax code. It just saves everyone time and money and stops the blame game before it gets started. Basically, it does put the onus back on the employee to check their own tax code using their Personal Tax Account. As this new system develops, the requirement to use these PTA’s is predicted to increase. So it would be wise to familiarise yourself with yours and encourage others to do the same.
Issues with the system
Obviously, it’s a new system, so there have been some initial problems. Data can still be misinterpreted. For example, a one off bonus figure one month is taken as a pay increase and this figure is used to work out your estimated pay for the year. These mistakes seem to be more likely at particular times of the year, like if they coincide with the P11D processing in August. A simple reminder for employees to check their PTA at the time of receiving a bonus could prevent a bigger problem down the line.
Main takeaways
- Activate your Personal Tax Account
- Don’t assume it’s correct: check your current details are accurate and change them if they are wrong, everything can be fixed
- Keep an eye on your PTA when you are issued your new tax code in April (use check list above, as well as checking all the basic details)
- If anything in your employment situation changes, make sure that this is accurately recorded in your PTA.
