Real-time tax for those employed has seen HMRC pushing a number of changes through. These include payrolling of benefits in 2016 and now coding changes.
Employers can now register themselves before the start of tax year to tax benefits as they are provided to employees. Employees used to pay a tax element through their self assessment returns or wait for the correct tax code to be issued to suffer tax at a much later date of receiving benefits. HMRC guidance on payrolling can be found here.
HMRC states that currently 8m people underpay or overpay their tax each year. Two thirds of these people (5.5 million) overpay tax, of which just over 50% are the lowest paid, earning under £15,000 a year. Additionally the current system can take up to two years for an individual’s tax account to be balanced after an underpayment has occurred. HMRC estimated that ‘these improvements will stop most people paying too much tax during the year or getting unexpected tax bills at the end of the year. They will now pay the right tax at the right time.’
From July 2017 HMRC is now generating new PAYE codes as soon as possible after receiving notifications from employers, pension companies or the taxpayers’ personal tax accounts. HMRC’s intentions are to calculate and notify the employer or pension company to repay, hopefully within the same tax year, so there is no delay in the tax refund or an unexpected bill at the year end.
However, there will be limits to the amount of tax which can be collected through the PAYE code:
it can’t be more than 50% of income; and
it can’t double the tax liability.
While HMRC will try to use cumulative PAYE codes, they will use W1/M1 codes if any backlog is £15 or more per month. Obviously, for lower paid employees and those with tight budgets, these fluctuations could be significant and employers may be asked why the pay the person receives has fluctuated.
HMRC is encouraging people to use their online personal tax account where they can view any changes to their tax code, learn more about how their tax code is calculated and access help and support if needed. Many employers may wish to advise employees to use their account.
The Agent’s Talking Points webinar was titled: “Paying the right amount of tax through PAYE: PAYE has changed”. A recording of an earlier webinar on the same topic is available here.
In this webinar, the presenter emphasised the benefit of these changes with respect to making refunds sooner with two worked examples (reproduced below). These examples dealt with additional benefits where a change in tax code would collect the tax sooner.
In the tax year 2017/18, Susan has a salary of £24,000pa and a personal allowance of £11,500 so her tax code is 1150L. Her usual tax deduction is around £208pm.
From 6 April 2017 Susan begins to receive a new health benefit of £200pa so 20% extra tax will be due, i.e. £40pa. Susan notifies HMRC of this benefit via her personal tax account in June 2017.
Now HMRC will collect this tax by reducing her tax code to 1130L. A cumulative notice is OK, as there is less than £15 difference in the first month which is July 2017.
In July Susan’s employer will collect the additional tax due for April-July of 4 x £3.33 = £13 (less than £15 so a cumulative correction is OK), and then the monthly additional tax from August 2017 onwards. By March 2018 Susan will have paid all the extra tax due on her new benefit.
John has a salary of £30,000pa and a personal allowance of £11,500 so his tax code is 1150L. His usual tax deduction is around £380pm.
From 31 October 2017 John receives a company car with private use and fuel benefit. The benefit for the remainder of the tax year is worth £5,000 so tax of £1,000 will be payable for the period. Once John notifies HMRC say via his personal tax account, HMRC will send a tax code notice to him.
John doesn’t need to do anything unless he wants to change the tax payment, eg as a lump sum, or if he would have financial difficulties in paying. HMRC will also send the code to the employer for the next payday.
The new tax code will collect £200pm over the remaining pay days from November to March. This would be done on W1/M1 as the backlog would be more than £15 per month. John will have paid all £1,000 due in tax by the year end, rather than just part of it, with a balance due the following tax year in addition to the 2018/19 charge.
HMRC also suggested that collecting the tax earlier is harder on John now, but it is easier for him to plan. It is all up to an Individual taxpayer who will have his/her own opinions as to which method is preferable.
These changes of managing benefits and over/under tax payments through the current tax year should work in an ideal world, subject to:
HMRC being able to amend the codes correctly in time
the risk of issuing/amending PAYE codes twice if the individual AND the employer notify HMRC electronically being eliminated
the link between PTA and P11D information being maintained.