HMRC’s new coding system unlikely to work (yet)
Faster tax codes delayed
Making Tax Digital (MTD) includes HMRC’s new “PAYE refresh”, also called “dynamic coding” if you pay tax through PAYE. It promises a quicker response where code numbers need amendment. It was originally supposed to start in early 2017, but was put back to 31 May, then to July. For individuals, the most important aspect of the new system is how it can affect the timing of PAYE tax.
HMRC has produced a webinar about the new system (see The next step ). If you choose to watch it keep in mind that it’s full of inaccuracies and propaganda, such as the suggestion that individuals want to pay tax sooner. However, the webinar is useful in highlighting some of the system’s shortcomings and inadvertently hints at how you can, if you want, avoid paying tax sooner.
There’s nothing wrong with the motive behind PAYE refresh. The intention is to adjust your tax code quickly so you don’t pay too little or too much through PAYE. The trouble is HMRC has little access to up-to-date information, essentially only that provided through RTI which won’t often affect your code. Therefore, for now at least, the new system relies heavily on you informing HMRC about changes which might affect your code.
Trap. If you tell HMRC about a change in your taxable income or outgoings it will adjust your code to collect all the tax payable by the end of the tax year. Previously if HMRC was unable to change your code quickly some or all of the tax you owed had to be collected by issuing a bill after the end of the tax year or by amending your code for a later tax year (see The next step ).
Tip. Currently, you aren’t obliged to tell HMRC during a tax year about changes to your circumstances that might affect your tax liability. For example, if your company starts to provide you with a taxable perk with effect from 1 October 2017, you don’t have to tell HMRC about it until you complete your self-assessment tax return. Note. Employers are required to tell HMRC if the perk in question is a company car.
Tell HMRC or not?
Naturally, if a change in your circumstances will increase your tax, you’ll probably want to delay telling HMRC until you’re required to, and thus defer the tax bill. Remember, the tax will be payable eventually. Conversely, if a change will reduce your tax bill, e.g. ceasing to receive a taxable perk, you can also choose to say nothing.
PAYE - the shape of things to come
We think that for some time to come the new system will be largely ineffective, unless you promptly tell HMRC about changes to taxable income. It’s testing systems for obtaining data about your taxable income and outgoings direct from banks and other organisations. Until then you’re mainly in control of what HMRC includes in your tax code.