PAYE Refresh: HMRC's new plans for how you pay tax

HM Revenue & Customs (HMRC) is set to introduce changes to the way employers deduct tax from employees' pay as part of its Making Tax Digital project on 31st May.

The proposed changes of the PAYE Refresh project, also referred to as ‘dynamic coding’, were outlined in a consultation document: Making Tax Digital: Transforming the tax system through better use of information. It refers to the use of third-party information, such as payroll data and bank interest, which is already submitted to HMRC.

HMRC intends to use employment and pension data reported under Real Time Information (RTI) to update tax codes more regularly. The hope is that this more regular updating of codes will mean more PAYE taxpayers pay the correct amount of tax in year and that the number of PAYE under and overpayments (P800s) will reduce.

Although sending earnings data to HMRC under RTI has been running for over four years, it hasn’t been used in real time to effect PAYE coding changes. Since its introduction, there has been a very significant rise in end of year P800s. Last year the number of forms issued reached eight million and HMRC says two-thirds of those involved a tax repayment to taxpayers who had not earned enough over the tax year to pay tax. One of the positive attributes of PAYE refresh is that those taxpayers won’t have to wait for an end of year refund.

A change employers and pension providers may see is the volume of coding notices increasing because HMRC will be more proactive, changing codes more often to achieve the right amount of tax being paid in the year. However, HMRC has promised that there will be no more than one code change per month per taxpayer.

Other taxpayers will see quicker and more significant tax deductions, as HMRC attempts to recover all the tax due by the end of the current tax year, rather than carrying some over to be coded out in a later year.

The impact will be greatest in the 2017/18 tax year. There were delays to the PAYE reconciliation process for 2015/16 (P800s for 2015/16 were issued later than the usual June to September timeframe). The result of these changes will be more severe if there is a similar delay to 2016/17 reconciliations. If a 2016/17 reconciliation is not completed until November/December 2017 there will be a shorter period over which to collect the underpayment than if a reconciliation is done in June 2017.

The net effect of these changes is that tax agents and employers will receive more frequent coding changes. HMRC has designed a briefing pack for employers but this breakdown of the PAYE code won’t be provided to the tax agent or employer, so employees are encouraged to activate and use their Personal Tax Account (PTA) to see the how the PAYE code is made-up.

Employees can watch this video on the HMRC YouTube channel, which explains the PAYE changes.

If the taxpayer signed up to ‘go paperless’ when they activated their PTA, they will get a text message to their phone when a new PAYE code is allocated. Everyone else will continue to receive a P2 by post.

If you need more information and help getting your business ready for Making Tax Digital, call us today on 0203 862 2059.

Date published 11 May 2017 | Last updated 11 May 2017