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The codes they are a changin'

New and incoming changes to tax codes could have a big impact on pay packets as IMS Member Mike Holland reports in this personal look at what’s changing…

HMRC have recently introduced the concept of “Dynamic Coding” into the PAYE system, which will result in more frequent changes to tax codes. The aim is to reduce the number of taxpayers (I refuse to embrace HMRC’s misuse of the word “customers”) who will have tax under/overpayments at the end of the tax year.

What follows is a broad overview of the new era, from my own perspective.

As of 2 July this year, tax codes will be changed when HMRC receive information from the taxpayer, employer, pension provider or Department of Work & Pensions regarding untaxed income or adjustments. This could be the commencement of a benefit-in-kind or receipt of the state retirement pension. “Nothing new here” I hear you say. Well, what is new is that, using the Real Time Information provided by employers and pension providers, HMRC will estimate the additional tax payable, or tax reduction, for the year and incorporate an adjustment into the tax code to pick up, where possible, the entire adjustment in the current tax year.

Big change, big impact…

This is a significant change, as previously an underpayment would have been collected over 12-36 months. Depending on the amount of the estimated underpayment and the point in the tax year when the code is adjusted, take home pay could be hit hard. But do not worry, there is a safety net; the amount of tax deducted cannot exceed 50% of pay. There, I knew you would feel relieved; you will be able to keep what’s left.

Later in the 2017/18 tax year HMRC intend to use the information they receive from banks and building societies to adjust tax codes for any interest on which tax is due. Given that this will be towards the end of the tax year, a full year’s tax will potentially be paid over a short period.

If the reduction in net pay resulting from the above is severe enough to cause hardship HMRC may, on request, agree to spread the tax recovery over more than one tax year.
Checking tax codes is now more important than ever!

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