Under the PAYE ‘Real Time Information’ scheme employers report to HMRC electronically
before making any salary or wage payments. To ensure that the right amount of tax is
deducted the employer uses the Code issued by HMRC. However, every PAYE Code
Number is an estimate, since HMRC cannot guarantee the allowances or deductions
included in the calculation of a PAYE Code number are accurate. As a result many
taxpayers find that the amount of tax deducted by the end of the tax year is wrong.
Under the system named ‘Dynamic coding’, Codes are issued as soon as HMRC receives
notification from employers, pension companies or the taxpayer themselves (via entries on
their personal tax accounts). HMRC looks to amend the code within the tax year so that
there is no delay in issuing a tax refund or, if the amendment results in an underpayment of
tax, the taxpayer is not faced with an unexpected bill at the year end. To achieve this HMRC
use the information they receive, estimate the amount that would have been owed at the tax
year end and include this amount as a restriction in the current year’s tax code (termed ‘in-
year adjustments’). The assumption is made that an employee will continue to receive the
same level of pay for the rest of the tax year as they have to date and so unless a ‘trigger’ is
subsequently made the code will remain until another ‘trigger’ is applied. The limit to the
amount of tax that can be collected through the PAYE code is less than 50% of income and
the tax liability cannot be doubled.
Only specific ‘trigger’ events generate changes to tax codes. Such events are notifications of
change in an employee’s circumstances, e.g. a new employment, a new benefit-in-kind,
increase in salary, etc. The receipt of data from employers will not be a ‘trigger’ point, unless
the employer’s monthly Full Payment Submission includes a start date for a new
The receipt of a pension can cause problems under such a system. For example, if a
taxpayer is employed and starts to receive an occupational pension during the year, the
pension company will supply the information to HMRC and as such there will be a ‘trigger’
event. Unless being the primary source of income, an occupational pension will always be
treated as the secondary source such that personal allowances will be allocated against the
primary income (ie the salary in this instance). The taxpayer may want the allowances to go
against the pension first and the only way to change this is by the employee contacting
As coding’s can only be amended following a ‘trigger event, one of the areas where problems
can arise is when an employee leaves. This is because employers are only permitted to
send HMRC leaver information before employees are paid which means that HMRC are
unable to make the ‘new’ job the primary employment (and therefore restore a cumulative
personal allowance) until the ‘leaving’ notice (a Full Payment Submission) is submitted by
the previous employer.
Bonuses can also cause problems as estimated pay may be considerably higher than actual
pay. HMRC’s 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 for that month.
HMRC have increasingly been issuing codings to include an estimated amount of dividends
or rental income based on the previous year’s tax return information resulting in a reduction
in monthly pay. Tax on such income is not due until 31 January after the tax year end and
therefore HMRC is, in effect, collecting tax in advance.
If you believe your tax code is wrong you should contact HMRC who will issue your
employer with a revised tax code as required.
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