Under a system known as dynamic coding, certain ‘trigger events’ will cause HMRC’s computer systems to automatically adjust the employee’s tax code1 during the tax year. These trigger events might include the start of a new employment-related benefit, or a notification from the employee of a change to their estimated income for the tax year. The employee’s tax code will then be adjusted by HMRC to try and ensure that enough tax is collected during the tax year.
Jon Stride, Co-Chair of the ATT’s Technical Steering Group, said:
“The system of dynamic coding is designed to ensure that more people pay the right amount of tax during the year, reducing the risk of under or over payments of tax arising at the end of the tax year.
“However, when an employee receives a bonus, the method used by HMRC to calculate any potential under-payment of tax can result in too much tax being deducted. Under dynamic coding the system estimates the employee’s pay for the whole tax year from the information supplied by the employer on each payday.2 Unfortunately, HMRC’s systems cannot differentiate between a one-off increase in pay, such as a bonus, and ongoing salary. Therefore, when an employee receives a bonus, the system assumes that they will continue to receive the same level of pay for the rest of the year. This means that the employee’s earnings for the year will be overestimated and any code that is issued under dynamic coding could result in too much tax being collected.”
Employees who receive a Christmas bonus in their December pay packet should check any new tax code notices received in the New Year carefully to see if the coding issued will result in them paying too much tax.3
Jon Stride continued:
“The good news is that the risk of an incorrect tax code can be resolved in a relatively straightforward manner. The solution is to log into your Personal Tax Account (PTA)4 and check HMRC’s estimate of your annual income. Supplying HMRC with a revised estimate of income for the 2018/19 tax year should make sure that any future codes issued under dynamic coding are reasonable. Where an employee has already received an incorrect tax code, updating their estimated annual income should result in the issue of an amended tax code.