Dynamic PAYE Tax Coding

By September 8, 2017Payroll Outsourcing

From this July HMRC have introduced what has been coined dynamic PAYE tax coding. This has generated some interest in the payroll world, although it is the logical progression with RTI (Real Time Information), there are some potential issues.

The initial intention was to introduce this change at the end of May, but it was delayed until July as some fixes and further testing were required prior to the system going live.

What does this mean?

“HMRC will use real time information to make automatic adjustments to PAYE tax codes as they happen, rather than waiting until the end of the tax year.”

The aim is to reduce errors, and ensure employees pay the right amount of tax rather than being owed a refund or having a liability at the end of the tax year. HMRC will issue tax code notices as soon as they believe there has been a change in employee circumstances.

What is the actual impact of the change?

For many employees there will be no impact at all. Where HMRC are adjusting a tax code they should still notify the employee, although this does not always seem to happen. These changes should be viewed in line with the Personal Tax Accounts, where employees can see and potentially amend their live tax information.

Any issues are likely to be where HMRC might apply an estimate, and this does not match an employee’s current circumstance. Employees will then need to contact HMRC and try and get the issue corrected, which can be a frustrating and long winded process.

HMRC have put together a help pack for employers with further information on the changes with PAYE available here.

Is there anything else we can do to try and reduce the possibility of errors?

This is an HMRC automatic system, and has only just gone live, so it is early days. It is certainly worthwhile considering running Benefits in Kind through the payroll, rather than via P11Ds. One of the potential areas for error is incorrect estimates of benefits to be received in the tax year, so by reporting the benefits in real time this should be avoided.

The information supplied to HMRC from the payroll must be accurate. Starter forms must be accurate, and employees must inform HMRC accurately of any change in their circumstances.

In summary

Wait and see. This could work well, but we could get incorrect estimates and more frequent tax code notices for some employees.