Is your tax code correct?

Taxpayers are being urged to check their tax codes after HM Revenue & Customs introduced a new “dynamic coding” system in July. The new system is designed to help about 6m people who either end up paying too much or get an unexpected tax bill at the end of the year. However, some taxpayers face the risk of significant deductions from their pay packets as a result of this new approach to calculating pay-as-you-earn (PAYE) codes.

The new automated system is able to adjust PAYE codes, which determine exactly how much tax an individual must pay, as soon as there is a change in their income. It is also aiming to collect tax debts far more rapidly than in the past, resulting in some taxpayers facing big and unexpected fluctuations in their take-home pay. 

Any new system is likely to have teething problems but it is already showing signs of struggling to deal with people with irregular income, multiple sources of income and other special circumstances.  Problems have also arisen in cases where people have been paid bonuses or worked abroad for part of a tax year.

One of the biggest changes concerns underpayments which used to be collected over 12-36 months and now will be automatically “coded out” over the remainder of the tax year in which they come to light. These adjustments, which could be particularly large if made towards the end of the tax year, will be compounded for taxpayers who have underpayments from previous years that are already being collected via their tax code. 

HMRC have said that the changes mean that millions more taxpayers will be paying the right tax at the right time, meaning they would not face unexpected bills at the end of the year.  However, although coding notices are sent to individuals every time there is a change of tax code, most taxpayers do not check their tax codes (or even understand them properly to be able to check them) and so, in many cases, any change to their net pay or pension may well come as a bit of a shock. 

If you believe your tax code is incorrect you should contact HMRC or your tax advisor as soon as possible.