PAYE: Paying the right amount of tax

Since the introduction of RTI HMRC seem to be generating even more random PAYE codes than previously, so I was keen to hear about the latest changes to PAYE coding.

At present eight million people under or overpay tax each year through PAYE, and two thirds of these are overpayments, of which half are based on an annual income of less than £15,000. These overpayments can take up to two years to refund and there is, presumably, a similar delay on the collection side too.

New codes

From July 2017 HMRC will be generating new PAYE codes as soon as possible after receiving notifications from employers, pension companies or the taxpayers’ personal tax accounts. HMRC intend 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 nor an unexpected bill at the year end.

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

Whilst HMRC will try to use cumulative PAYE codes, they will use W1/M1 codes if any backlog is £15 or more per month.

Whilst the presenter was emphasising the benefit of these changes with respect to making refunds sooner, the two examples in the webinar (reproduced below) dealt with additional benefits where a change in tax code would collect the tax sooner. This is said to save the taxpayer a large bill at the year end.

Example 1

Susan has a salary of £24,000pa (£2,000pm) and a personal allowance of £11,500 so her tax code is 1150L. Her usual tax monthly deduction is around £208.

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

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: 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 £3 per month additional tax from August 2017 onwards. By March 2018 Susan will have paid all the extra tax due on her new benefit.

Example 2

John has a salary of £30,000pa (£2,500pm) 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 £1000 will be payable for the period. John could notify HMRC via his personal tax account but leaves his employer to notify via the P46(car) process.

This is probably wise as, with my experience of HMRC and PAYE codes, I fear that HMRC would amend the code twice. I did ask how this would be dealt with but my question was not answered.

HMRC will send a tax code notice to John who doesn’t need to do anything unless he wants to change the tax payment, e.g. 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.

There was no indication of the timescale of issuing a correction in the event of such a communication from John amended code and I suspect that this would arrive too late.

The new tax code will collect £200pm over the remaining paydays 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 say that collecting the tax earlier is harder on John now, but it is easier for him to plan. Individual taxpayers will have their own opinions as to which method is preferable.

Conclusion

Overall, I think that managing benefits and over/under tax payments through the current tax year is a good idea. However, I have great reservations about HMRC’s ability to amend the codes correctly as they do not currently handle the RTI in real time but by delayed interfaces.

Also, there is a risk of amending PAYE codes twice if the individual AND the employer notify HMRC electronically.