22nd September 2017
In July 2017, HMRC introduced a new payroll system, called dynamic coding. This system now applies across all payrolls, and allows HMRC to make changes to employee tax codes more quickly and efficiently.
Essentially, the Revenue now uses data collected from the individual taxpayer and from the employer to make immediate adjustments to tax codes, rather than waiting until the start of the following tax year. This allows the faster collection of monies and a reduced risk of underpayment. Both internal payroll managers and accountants who manage payrolls on behalf of companies are starting to see these changes come into effect, so we have put together a quick guide to help:
An employee’s tax code will now change when HMRC is made aware of something that affects the existing tax code. This is called a ‘trigger point’ and will usually be based on data that comes from either the employer, the authorised accountant or from the individual via their Personal Tax Account. This might include a change in taxable benefits, such as a car, or it might include a bonus payment or increase in salary.
The update to the individual’s tax code is made as soon as the trigger point is recognised. So changes will be made in-year rather than at the start of the new tax year.
Tax professionals are still working out how the changes work in practice, as they have only had a couple of payroll events to work with so far. However, there may be challenges for those who have more than one job, or where pay and benefits change on a regular basis. The smooth working of the new system also relies on HMRC being informed of changes as soon as possible, rather than several months down the line, and so companies should educate their employees about their Personal Tax Account and the importance of keeping it up-to-date.
For tax professionals, the main challenge has been in describing or managing irregular payments, such as bonuses and commissions. This is because HMRC relies on an ‘estimated pay’ calculation, which is based on the Full Payment Submission, which states the total taxable pay for the current period and the year-to-date. Changes to that figure, such as monthly commission payments, create a trigger point, and payroll managers and tax accountants need to be able to advise their clients to check their Personal Tax Account as soon as they receive a notification of the change, as a tax code alteration can significantly affect the net pay that the employee receives.
There are likely to be more lessons to learn and approaches to develop in order to manage dynamic coding – if you have any questions about managing changes to your company’s payroll, or you have individual tax requirements, contact us today.