Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Some taxpayers face the risk of “significant and aggressive deductions” from their pay packets as a result of a new approach to calculating pay-as-you-earn (PAYE) codes, experts have warned.
Taxpayers are being urged to check their tax codes after HM Revenue & Customs introduced a “dynamic coding” system in July. The automated system is able to adjust PAYE codes which determine exactly how much tax an individual must pay as soon as there is a change in their income.
The new system is designed to help about 6m people who either end up paying too much or get an unexpected tax bill at the end of the year. However, experts say it is already showing signs of struggling to deal with data glitches, bonuses and employees on foreign assignments. It is also aiming to collect tax debts far more rapidly than in the past, resulting in some taxpayers facing big and unexpected fluctuations in their take-home pay.
Kate Upcraft, a payroll consultant, said there were already signs of problems with the system. She said HMRC had recently reported an increase in postal PAYE queries, suggesting “significant and aggressive deductions that people are querying, but not through the digital channels”.
“The biggest issue that will cause problems is HMRC’s misinterpretation of taxpayer data,” she said. “Those of us who know the standard of the data and some of the triggers it is using to amend codes are very concerned.”
Problems have also arisen in cases where people have been paid bonuses or worked abroad for part of the tax year. Steve Wade of EY, the professional services firm, said: “Any new system is likely to have teething problems and not surprisingly some globally mobile employees who have complicated affairs have been affected.
“In particular, the new process appears to ignore credit for foreign taxes paid, resulting in overestimating the tax due. In general, individuals returning from overseas assignments are liable to UK taxation from the date of their return. Unfortunately, some employees are finding that this new system attempts to charge UK tax from the start of the tax year.”
Mr Wade said HMRC also acknowledged that estimating pay when large payments such as bonuses are made early in the tax year was “causing difficulties”.
Sharron West, technical officer of the Low Incomes Tax Reform Group, said she feared the adjustments could lead to a great deal of stress and anxiety.
“We are very concerned that there may be significant ramifications for those on low incomes who have their tax codes altered so their net pay reduces significantly unexpectedly, as they are often on tight budgets.”
She said one of the biggest changes concerned underpayments which used to be collected over 12-36 months and now will be automatically “coded out” over the remainder of the tax year in which they come to light. These adjustments, which could be particularly large if made towards the end of the tax year, would be compounded for taxpayers who had underpayments from previous years that were already being collected via their tax code.
Under rules introduced in 2015, HMRC is able to collect up to £17,000 a year of tax debts directly from pay packets, subject to a limit preventing deductions of more than 50 per cent of an employee’s pay. The maximum deduction varies according to income, with a limit of £3,000 for those with incomes of up to £30,000.
HMRC said the changes meant that millions more customers were paying the right tax at the right time — meaning they would not face unexpected bills at the end of the year. It also said there had been a temporary issue affecting one specific customer group based abroad, adding that it was automatically updating their tax codes and refunding any additional tax paid.
HMRC said individuals faced with an unexpected tax bill could ask for extra time to pay. “If customers are faced with a tax bill they can request to spread their payment over time.”
But the adjustments will still come as a surprise to many. FT Money is aware of one case where an executive’s total net income dropped sharply after a new tax code was applied, shortly after he was posted abroad by his full-time employer.
“When I got through to HMRC’s self-assessment department, I was told that an incorrect tax code had been automatically applied by a new ‘dynamic coding’ process which had wrongly decided that I owed more than £53,000 in tax,” he said.
“I owe no tax. The man in the call centre noted that the system had been ‘a bit too dynamic’.”
Ms West said: “Although coding notices will be sent via online personal tax accounts or by post every time there is a change of tax code, most taxpayers do not check their tax codes — or even understand them properly to be able to check them — and so in many cases taxpayers will not be anticipating any change to their net pay or pension before it happens.
Ms Upcraft said: “People are being told to look at their personal tax accounts. But it does not show the history of the tax code, so unless a note is made of what was there before, it will be difficult for people to work out what has happened and they have to be comfortable with the digital channel which many aren’t, or don’t even know about.”
