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Dynamic coding: what will this mean for the taxpayer?

HMRC has recently launched a new system of “dynamic coding”, with the intention of making PAYE tax codes more sophisticated. The main change in this new system is the way in which under or overpayments are managed – using dynamic coding, possible incidents of this are replaced with in-year adjustments (IYAs).

Previously any issue of under or over payments has been reflected in codes for the following tax year; the new system will reflect changes in circumstances in the same tax year. Since the 2nd July 2017, HMRC has been processing new codes after receiving notice from pension companies, employers and individual tax payers for their personal accounts. The only instance where a cumulative PAYE code can’t be used by HMRC will be when any backlog is £15 or more a month, in which case a W1/M1 code will be designated.

With more benefits now being included in monthly payroll rather than on your year-end P11D (benefits in kind filing), this means any changes to your salary and benefits should be considered carefully as you may see an immediate impact on your take-home pay.

While one positive of this will be that refunds can be processed quicker in the case of overpayment, it is important to note that this goes both ways – if there is a case of underpayment of tax to HMRC, this will also be collected sooner. Nevertheless, the hope is that this will be a better scenario than a large unexpected bill at the end of the year and HMRC hopes that, by using real time data, this will lead to more tax payers ending the year tax balanced.

Written by Kate Saunders

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