PAYE has just gone dynamic

It’s National Payroll Week, so we thought it would be a good time to pick out a few topics that are currently high on the industry agenda. The latest comes from HMRC, which has recently announced the launch of a new system involving dynamic coding. 

The aim is to bring employee tax code information right up to date with the digital age and help introduce a more thorough avoidance technique.

Last year, HMRC released a consultation document that looked at some of the ways third party information, such as from banks and pension providers, could be used to affect an employee’s tax code. This information is already reported to HMRC, all that was needed was to bring the information together so that tax codes could be adjusted more frequently – and that the individual is paying the right amount of tax.

As PAYE tax codes become more refined, the dynamic coding system will address potential underpayments with in-year adjustments (IYAs). In the past, the potential underpayment was reflected in the tax code the following year, but the new system will reflect changes in an employee’s circumstances as soon as HMRC becomes aware of them. This is what is known as the “trigger point” – this is when the PAYE code is amended, either by the individual or the employer. Going forward, FPS will be used as a way of notifying changes to HMRC.

It all sounds very simple, but there has been some criticism around the new system. Namely, that it has started part-way through a tax year, so there could be a discrepancy in the estimated pay calculation, or tax owing. Estimated pay relies on there being an even amount of accrual throughout the year, but that isn’t always the case.

Any bonuses paid early in the year, for example, could cause headaches as estimated pay may be higher than actual pay for the rest of the year. There will then need to be another trigger event in order for the code to be revised.

There could be some teething problems in the beginning, but in the long term, this system is designed to be much more accurate. Plus, one of the benefits of the change means that PAYE tax payers will not need to wait until the end of the year to get a refund on any overpayments.

We would always recommend seeking professional advice for any payroll matters and the payroll team at Wilkins Kennedy can help with any guidance. We will be running a series of workshops as part of National Payroll Week, where we will be covering a number of employment-related topics such as paying taxes, PAYE, regulations, HR and much more. You can find more information on our events page or you can contact us if you would like to find out more information.

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