Tax Codes Explained 2019

With dynamic coding coming to the end of its second year of operation, you’re probably receiving many more tax code queries from employees than previously. What answers can you give them?

What is dynamic coding?

Dynamic coding is HMRC’s process for using estimated pay to ensure it collects the appropriate amount of tax in the tax year. To do this, various triggers are used to recalculate the estimated pay and it is these that lead to more frequent tax code changes. Dynamic coding only ever operates from April to the end of December each tax year; from January to March any underpayments are rolled forward into the new tax year.

Emergency or basic rate

As only about 30% of new starters present you with a P45 you often have to use the default tax codes generated by the statements on the starter checklist. Statements A and B both require the employer to operate the emergency tax code, either on a cumulative or non-cumulative basis. The emergency tax code provides the employee with the full personal allowance for the tax year (£11,850 for 2018/19) in the absence of any more information. Statement B requires the allowance to be operated non-cumulatively, i.e. each tax month in isolation, recognising that the employee will already have had some personal allowance at their previous employer.

BR confusion

Basic rate (BR) should not be confused with the emergency tax code. Employees who tick statement C are allocated code BR as they are indicating that their personal allowance is already being utilised against a different source of income, perhaps another employer or a pension provider. A BR tax code will simply deduct 20% tax from the employee’s gross taxable pay, assuming that this is not more than 50% of the total cash taxable pay this pay period, i.e. not considering any notional payments for benefits in kind.

Tax arrears?

But what if it’s a high earner who ticks statement C, and you know that 20% tax isn’t going to be enough and they’ll get into tax arrears until HMRC sends a new code through, can you avoid this?

The strict answer is “no”, only if the employee doesn’t tick any statement is the employer allowed to operate tax code 0T/1 in order for some tax to be deducted. 0T/1 is a much more appropriate code than BR as it will tax the individual’s income at all three tax rates of 20%, 40% and 45%.

Pro advice 1: You might take the view that it’s more appropriate to indicate that it is in “undeclared statement C” and operate 0T/1 for employees to whom basic rate will lead to arrears.

Pro advice 2: You are not allowed to operate S0T/1 even if you believe the individual is a Scottish taxpayer, based on the starter checklist. You must wait for HMRC to issue that code even though in the interim the employee could be paying the wrong amount of tax.

Prefix v suffix

Codes with a K prefix are in effect negative tax codes. They instruct the payroll software to add an additional amount of money into taxable pay before the tax calculation takes place. They arise because the individual has either benefits in kind or tax from a prior year that exceeds the personal allowance for the year. The suffixes of L, M and N at the end of the tax code are simply a way of grouping together individuals with similar circumstances so that they can be uplifted en masse at the start of each tax year to save you time.

 

To summarize, a BR or K tax code can lead to arrears or an overpayment, so make sure employees are clear whether these are correct for their circumstances. As only about 30% of new starters present you with a P45, use the default tax codes generated by the statements on the starter checklist.

For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.

Companies999 are Chartered Certified Accountants and Birmingham’s Best Company Formation Agent.

For any assistance contact Companies999, we will be happy to help you!

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