HMRC’s new dynamic PAYE coding system demonstrates teething troubles

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The system is supposed to automatically adjust PAYE codes that determine how much tax individuals need to pay as soon as there is a change in their income.

A new dynamic coding system to calculate pay-as-you-earn (PAYE) codes in the UK is already showing signs of trouble, according to experts.

The system, which was introduced by Her Majesty’s Revenue & Customs (HMRC) in July, is supposed to automatically adjust PAYE codes that determine how much tax individuals need to pay as soon as there is a change in their income.

The aim is to make life easier for the six million people who either end up paying too much tax or get an unexpected bill at the end of the year. Another goal is to collect taxes more quickly than has been possible in the past.

But experts told the Financial Times that data glitches mean the system is already struggling. Kate Upcraft, a payroll consultant, said HRMC had recently reported an increase in postal PAYE queries as a result of “significant and aggressive deductions that people are querying, but not through the digital channels”.

The biggest issue for HMRC was likely to be misinterpreting taxpayer data, she added. “Those of us who know the standard of the data and some of the triggers it is using to amend codes are very concerned,” Upcraft said.

Problems have also arisen where people have been paid bonuses or have worked abroad for part of the year on foreign work assignments. Steve Wade, executive director in EY’s human capital practice, explained: “Any new system is likely to have teething problems and, not surprisingly, some globally mobile employees who have complicated affairs have been affected.”

There seem to be particular issues around the system ignoring credit for foreign taxes that have already been paid, resulting in an overestimation of the tax due, he continued.

“In general, individuals returning from overseas assignments are liable to UK taxation from the date of their return,” Wade said. “Unfortunately some employees are finding that this new system attempts to charge UK tax from the start of the tax year.”

He added that HMRC had acknowledged that estimating salaries when large payments such as bonuses were made early in the tax year was “causing difficulties”.

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