Employers could soon see a further ‘tweak’ to the operation of Pay As You Earn (PAYE) codes through the Real Time Information (RTI) system via dynamic coding.
As part of the new system of ‘dynamic coding’, since May 2017, the Government has been increasing the number of PAYE codes sent to employers.
The system aims to use the information that HM Revenue & Customs (HMRC) is gathering from various sources to estimate an individual’s total annual income and, from that, work out what their final tax bill will be.
Under dynamic coding, potential underpayments are replaced with in-year adjustments (IYAs), which reflect changes in an employee’s circumstances as soon as HMRC becomes aware of the change. This is called the ‘trigger point’.
However, it would appear that this system is struggling with irregular amounts, such as bonuses, commission, variable pay, dividends or income from overseas.
As far as bonuses are concerned, particularly if they are paid early in the year, estimated pay may be considerably higher than actual pay.
The estimated pay calculation assumes that pay accrues evenly throughout the year and, where a bonus has been paid, average weekly or monthly pay will be higher than normal. This calculation is only performed when there is a trigger event and is not revised each month following submission of the final payment submission (FPS).
Interestingly, however, the solution to many of the problems associated with dynamic coding lies with the employee. Workers need to ensure they have activated their Personal Tax Account (PTA) so they can check the amounts they have been charged and inform their employers accordingly.
For more information about The Fish Partnership’s payroll services and how we might be able to help, please contact us.