Dynamic tax coding: what it means for you and your employees

In July of 2017, HMRC announced and launched a change to the PAYE system. Since its release, HMRC have begun to use real time information from employers when calculating employees’ taxes. Termed ‘dynamic coding’, this new system looks to adjust tax codes as they occur (known as ‘in–year adjustments’ or IYAs) as opposed to waiting until the following tax year.

By using your employees’ annualised year to date pay, HMRC will generate them a tax code for the year. However, using real time information, known as ‘trigger points’ HMRC can ensure that the IYAs are accurate throughout the year, streamlining the tax system and making sure that tax codes are changed instantly to correct and collect any over/underpayments that arise due to the change in situation immediately rather than waiting until the years end.

There are some issues however. Because the tax system assumes that pay accrues evenly throughout the year, any benefits, perks or bonuses, especially if paid in the first half of the year, can drastically increase your estimated yearly pay compared to your actual pay, skewing your tax code.

This can be mitigated by companies and individuals informing HMRC online about any changes to circumstance. However, should this not be done, then the systems at HMRC will continue to under/over charge employees, potentially causing large tax bills in the future.

If you are unsure of how dynamic tax coding will affect you or your employees get in contact with us as soon as possible. Call Graham Purvis Tax Director on: 0191 281 8191 or email: gpurvis@robson-laidler.co.uk