Major changes to the way in which PAYE tax codes are calculated have been introduced. The introduction of Dynamic Coding now means that any underpaid tax will be collected in the tax year in which it arises. Once HMRC is advised of a change in circumstances, instead of calculating a “potential underpayment” as has been the case in the past, an actual underpayment to date will now be calculated and a further adjustment made to the employee’s tax code to collect the hitherto tax on the benefit.

The extra adjustment is based on HMRC’s estimate of the employee’s anticipated total pay for the tax year. This is obtained by a simple pro-rating calculation based on the salary received to date. It should be noted that because this calculation is only performed at the time of the “trigger event” that alerts HMRC to the change in circumstances, this could cause problems in situations where pay to date figures are distorted by other events, for example the payment of a bonus in the early part of the tax year. The estimated pay figure used in Dynamic Coding is not recalculated each time a Full Payment Submission is made and may result in inaccurate inyear adjustments being included in employees’ tax codes.

The success of the system will still depend to a large extent on employees advising HMRC of changes to their personal circumstances at the earliest opportunity.  Employees can contact the HMRC helpline directly on 0300 200 3300. For more information on Dynamic Coding please contact the Payroll Department on 028 9032 3466.