Professional March 2019

PAYROLL INSIGHT

In-year triggers – it’s all in the coding

Helen HargreavesMSc ChFCIPPdip, CIPP associate director of policy, sets out the development of what was formerly known as ‘dynamic coding’

I n July 2017, HMRC introduced a system of dynamic coding enabling it to make quicker use of real time information (RTI) data and making in-year adjustments (IYA) to a person’s tax code. By using third-party information from pension providers and personal tax accounts (PTAs), HM Revenue & Customs (HMRC) began updating tax codes to collect underpayments in year through an IYA rather than show it as a potential underpayment which, in the past, was collected during the following year. The intention was also to minimise the use of week-1/month-1 basis codes to speed up tax refunds which were not previously repaid until after the tax year end. Initially this concept was welcomed; after all, wasn’t this one of the benefits we were promised when we began submitting RTI data? But as with almost all HMRC projects, this seemingly simple enhancement wasn’t quite what it seemed. Trigger points HMRC relies on two key factors to make an IYA – the individual’s estimated pay, and a trigger point. The tax code will only be amended if HMRC becomes aware of a change in the employee’s circumstances – this is the trigger point. A trigger point could arise in any number of ways such as an individual amending their PTA or by an employer notifying a change via a full payment submission (FPS).

Estimated pay To check whether an IYA is required following a trigger event, HMRC will estimate the employee’s income for the tax year by taking details of earnings reported for the period to date and performing a simple pro-rating calculation to arrive at an annualised figure. The estimated pay calculation assumes that pay accrues evenly throughout the year – and herein lies the source of many problems for employees and payroll practitioners alike. ...as with almost all HMRC projects, this seemingly simple enhancement wasn’t quite what it seemed Bonus payments The flaw in the system is that the calculation of estimated pay does not discriminate between regular payments of salary and irregular bonuses. As this calculation is only performed at the time of the trigger event and not each time a FPS is made, this can lead to the estimated income for the year being too high, and inaccurate IYAs being included in employees’ tax codes.

Unexpected outcomes When I say ‘unexpected outcomes’, I mean that HRMC seemed to be caught unawares by the impact dynamic coding had on many payroll practitioners. Many employers reported an influx of new tax codes being received, often several for the same employee in the same month with little clarity over which one was correct. Payroll bureaux were particularly impacted, with even medium sized bureaux claiming they received up to fifty new codes every day, and some received many more than that. For those employees who received a bonus at the beginning of the tax year the outcome was even worse. Because HMRC’s system cannot identify one-off payments, employees often discovered that they were hundreds of pounds out of pocket as a result of an incorrectly issued tax code. HMRC’s solution was to advise employees to update their estimated annual income on their PTA. Not quite fulfilling the promise that dynamic coding would help people pay the right tax on their income as they earned it. Finding a fix to these problems was the subject of many long conversations between HMRC and payroll stakeholders including the CIPP. New in-year triggers HMRC has now announced its plans to introduce two new enhancements to the system, now known as in-year triggers, to

| Professional in Payroll, Pensions and Reward | March 2019 | Issue 48 16

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