The dynamic coding tax system: what you need to know

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Since July 2017, HMRC are now utilising real time information from employers in order to calculate the taxes of their employees, calling the new system ‘dynamic coding’. This system looks to overhaul the way in which over and underpayments are managed by HMRC, by adjusting tax codes dynamically annually (known as ‘in–year adjustments’ or IYAs) as opposed to waiting until the following tax year. This system looks to streamline the current PAYE system by making changing tax codes more rapidly.

By utilising your employees’ annualised year to date pay, HMRC will generate them a tax code for the year and alter it accordingly using real time information, known as ‘trigger points’, should there be a change in their tax situation. This system allows HMRC to ensure that the IYAs are accurate and therefore correct and collect any over/underpayments that arise 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 at: [email protected]

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What the HMRC Making Tax Digital scheme means and how it will benefit your business

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