Pay As You Earn - Dynamic Coding Is Here…

02 August 2017

In amongst all the more publicised changes to taxation introduced – and to be introduced – by the 2017 Finance Bills, Dynamic Coding has now arrived. Despite the new system’s rather dramatic name, the change was quietly introduced with little fanfare on 2 July 2017, despite the new system representing a major change to the manner in which PAYE tax codes are calculated.

In the past, when advised of changes to an individual’s personal circumstances, changes to tax codes part of the way through the year would not take into account any tax underpaid as a consequence of a delay between the change of circumstance occurring and HMRC being able to issue a new tax code. The classic example of this would be the provision of a new company car, a change which could see a significant time lag between the employee receiving the car and HMRC being advised of the change thanks to the quarterly reporting rules.

In the past such underpayments were put to one side and calculated at the end of the tax year, the collection usually being made by an adjustment to the tax code for the following year. However, the introduction of Dynamic Coding now means that any underpaid tax will be collected in the tax year in which it arises. Once HMRC is advised of a change in circumstances, instead of calculating a “potential underpayment” as has been the case in the past, an actual  underpayment to date will now be calculated and a further adjustment made to the employee’s tax code to collect the hitherto tax on the benefit.

The extra adjustment is based on HMRC’s estimate of the employee’s anticipated total pay for the tax year.  This is obtained by a simple pro-rating calculation based on the salary received to date. It should be noted that because this calculation is only performed at the time of the “trigger event” that alerts HMRC to the change in circumstances, this could cause problems in situations where pay to date figures are distorted by other events, for example the payment of a bonus in the early part of the tax year. The estimated pay figure used in Dynamic Coding is not recalculated each time a Full Payment Submission is made. This will likely result in inaccurate in-year adjustments being included in employees’ tax codes.

The success of the system will still depend to a large extent on employees advising HMRC of changes to their personal circumstances at the earliest opportunity, something that HMRC is encouraging through its promotion of the Personal Tax Account, though it is anticipated that more information will be submitted by employers through Full Payment Submissions as the system develops.

To find out more please get in touch with us.

Got a question? Speach bubble

Make an enquiry