What is dynamic coding?
In July 2017 HMRC changed the way that it collects tax with the aim of bringing more in, more quickly. Its argument is that taxpayers would rather pay their tax in-year than have it carried over to the next year. Dynamic coding is based on the concept of estimated pay, not just actual pay reported on the full payment submission (FPS).
There are several scenarios in which HMRC calculates estimated pay: (1) when an employee starts based on the salary and number of days to the end of the tax year; (2) when an employee leaves an employment that crystallises pay from that income source; and (3) at the end of January each year HMRC uses the month 10 YTD figures to estimate the next year’s pay for the annual coding run. Any change to estimated pay can lead to a tax code change, so for employees with multiple jobs or income sources there will be lots of changes to keep on top of.
Where is the estimate?
An employee’s estimated pay is displayed in their personal tax account alongside the actual pay that has been reported so far for the year by you. The employee can reduce the estimate down to whatever they wish as long as it isn’t below the currently reported YTD of course. It’s easy to activate a personal tax account if they haven’t yet done so – click here!
They’ll need a government gateway ID, NI number and proof of ID such as bank account details, P60 , their three most recent pay slips, or passport number and expiry date.
Benefits in kind
One of the triggers that can have the most significant impact for the employee is when you submit a Form P11D or P46(car) or they report such a change themselves. HMRC will try to recover all the tax that is due on the benefit in the remaining months of the year as long as there are more than three months left.
Dynamic coding is turned off between January and March each year as it would be unfair to try to collect tax on a benefit in just three months of the tax year. At present there is an error in HMRC systems such that whenever a P11D or P46(car) is submitted, HMRC also uses the “pay this period” from the FPS that it’s processing and uses that to create a new estimate.
If the employee has received a bonus or commission in that pay period HMRC extrapolates that as a new permanent salary and uses that estimate plus the benefit in kind on the P11D . This can lead to the full personal allowance being lost if income is perceived to be above £100,000 and a K code being incorrectly allocated.
Pro advice: Make sure employees know about these triggers so they can adjust their estimated pay in their personal tax account if they think it’s wrong. They can also do this by phone and HMRC operators should revise the estimate – advise them to ask to speak to someone more senior if they refuse.
For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.
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