Identifying the catalysts which prompt a change to PAYE tax codes has caused confusion for taxpayers and tax agents alike for some time. A recent webinar from HMRC attempted to address some of these long held confusions. The individual situations of each taxpayer determine the type of change that HMRC may make to your PAYE tax code.
Tax Code Reliefs and Allowances
This includes professional subscriptions, flat rate expenses and work related expenses amounts that are accounted for in your tax code. Unless you inform HMRC otherwise, these carry forward into subsequent tax years until it is obvious that you have retired. So, if your situation changes, you need to tell HMRC.
- Aggregated Expenses
Work expenses can only be applied to your primary source of income. So, if you are claiming expenses for more than one job, they are added together.
- Fixed in code
If you are claiming for work expense, flat rate expenses or professional subscriptions and your leave your job, these allowances and reliefs remain in your tax code. HMRC work under the assumption that you will get future employment in the same field and, therefore, they remain applicable. You can tell HMRC if your situation changes, or they may pick up on it during an their annual records scan. For example, this may show that your pension is now your only source of income.
- Pension Tax Relief
Pension tax relief applies to occupational and personal pension schemes, up to 75 years of age, when the relief is applied ‘at source’. The tax relief continues until the age of 75, even if the taxpayer is not in employment. If you don’t tell HMRC that it is a one off pension payment, then your tax relief is paid on the gross amount.
- Gift Aid Relief
Gift Aid relief is payable at the highest rate of tax you pay, if it is applied through your payroll.
How state benefits impact tax codes
The Department of Work and Pensions (DWP) informs HMRC whenever someone begins to collect their state pension or Employment and Support Allowance (ESA). This initiates one of four different possible impacts on your tax code and payments as a result.
- You do not need to worry about underpaying tax on your benefits, if the DWP tells HMRC about your uptake no later than one month from when you start receiving payments. This is because the benefit amount will be included as part of your tax code, with a Month 1 code to collect 1/12th of the annual amount every month during the tax year.
- If the DWP is late to tell HMRC about your benefit claim (after one month of the start date), you will end up with an underpayment of income tax. This is taken care of in the tax code of the following year and you get a Month 1 tax code in the current tax year. In other words, your underpayment because of HMRC’s tardiness is spread out over the following tax year’s monthly payments within your tax coding.
- Another situation which leads to underpayment, resolved in the following tax year’s code, is when receipt of benefits means that you are a first time taxpayer. Again, you will be given a Month 1 tax code.
- If your income is less than the Personal Allowance amount even with your benefit payments, then you will have no tax to pay. Your tax code will take account of your annual benefit payments (called “cumulative”), but you will not receive a tax code because you have no tax bill.
How is the amount in my tax code worked out?
The way HMRC take your ESA or state pension income into account within your tax code is called ‘coding out’ and it is worked out at the beginning of every tax year. Changes to the actual benefit payment amounts apply from week two of the tax year, so the equation for working out your tax code is: 1 x last tax year’s weekly amount + 51 x this new tax year’s weekly amount.
Occupational pensions
If you are working and are getting your occupational pension at the same time, it will only affect your tax code if you make the pension payments your primary source of income. Otherwise, occupational pensions are deemed secondary sources by HMRC.
Investment Income
This remains somewhat unclear, in terms of aligning with your tax code because the rates of tax on dividends and bank interest are not the same. HMRC prefer taxpayers to sort out any tax coding errors through their personal tax account. So getting in touch with HMRC seems to be the only guidance if you think your tax code may be wrong due to investment income considerations.
Are there any issues identifying which is ‘primary’ or ‘secondary’ employment in the same tax year, like if I get a new job?
Yes, there do seem to be some issues around the definition of ‘primary’ and ‘secondary’ jobs, particularly when taxpayers have changed employers. All of which can affect the accuracy of your tax code.
- As a new employee, your employer’s PAYE payroll system fails to choose the right A, B or C statement when it sends your details to HMRC. This could either be down to software issues, or payroll staff not being correctly trained in this area.
- Employers can only give your ‘leaver’ details to HMRC at the time of salary payment. This becomes problematic when you start a new job because there may be a substantial time lapse between the time you start your new job and your old job’s payroll information has caught up with you. In the meantime, your new employer has submitted statement B (I’ve already had a job this tax year but haven’t now) and your new job cannot be considered your primary income source until your old job’s Full Payment Submission has arrived at HMRC.
- If you choose Statement C as an individual taxpayer, your tax code will be set as BR. If this is chosen by your employer, you will be issued code OT/1. This discrepancy is confusing, to say the least.
- If your new company’s payroll software puts you on the system without a start declaration and date, HMRC will follow these conclusions: Statement A for a cumulative ‘standard’ tax code, Statement B for a week1/month ‘standard’ tax code or Statement C if NT, OT, D1, DO or BR given. For you, this means that HMRC start this employment as ‘secondary income’, you are hit with an emergency tax code or it is recorded that your ‘live employment’ has stopped. None of these outcomes are desirable when you simply want to start a new job as your primary source of income, with a cumulative personal allowance tax code.
- Payroll ID, as part of RTI, was touted as being the answer to these employment identification problems. But HMRC has not adequately fine-tuned the system and duplicate payroll records continue to complicated the system for all those involved; taxpayers, tax agents, HMRC and employers alike.
What can I do about my PAYE tax code?
This month sees the launch of HMRC’s new ‘dynamic coding’, which is yet to reveal its full impact. One of the most important things to do is initiate and engage with your Personal Tax Account. This can be accessed through an existing Government Gateway account.
As part of their ‘Making Tax Digital’ campaign, HMRC intends all tax issues to move online. It is also wise to inform HMRC as and when your employment situation changes. This ensures they have current information and can adjust your tax code accordingly. Thereby ensuring that you meet your tax liability and avoid overpaying tax through your tax code.
