In July 2017, HMRC began using monthly RTI data provided by employers to automatically adjust PAYE tax codes for employees during the year. This is intended to reduce the number of employees who end up with an under or over payment at the end of the tax year.
To check whether an in-year adjustment is required, HMRC will estimate the employee’s income for the tax year by taking details of earnings reported for the period to date and extrapolating these to a whole year. There can be problems if an employee has been paid a bonus in the period as the system doesn’t discriminate between regular payments of salary and irregular bonuses. This can lead to the estimated income for the year being too high, resulting in an incorrect tax code and a tax overpayment.
Stephen has a £65,000 salary, and at the end of April 2017 he received a £20,000 annual bonus. His employer operates PAYE on both the salary and bonus.
In July 2017 HMRC show his pay to date as being:
|Salary to date (3 months)||£16,250|
|Total income for period||£36,250|
This is then extrapolated to give an estimated yearly income of £145,000 (i.e. £36,250 multiplied by 4).
Based on this extrapolation, HMRC conclude that Stephen is not entitled to a personal allowance for 2017/18, and adjust his tax code accordingly.
However, Stephen’s actual income for 2017/18 will be £85,000, meaning his personal allowance should not be reduced.
What to do if a tax code is changed
Taxpayers who receive bonuses or other irregular payments should be aware that they may have their tax code changed inappropriately.
HMRC will normally send out a tax code notice when they make a change to an individual’s tax code, explaining the change and what to do next. Taxpayers or their advisers should always review these and make sure the information is correct, in particular any estimates of income for the year.
If an incorrect tax code has been generated, this can be resolved by updating HMRC on the estimated income. This can be done online by the taxpayer through their Personal Tax Account or by the taxpayer or their agent contacting HMRC by telephone.