July 2017 brought a major change in how tax code numbers are calculated if there’s a change of circumstances. Up until then, whenever there was a change, HMRC changed the tax code for the following tax year, and the taxpayer either received a refund or had to pay more tax during the following year. This will no longer be the case with the introduction of dynamic tax codes.
From now on, a change in circumstances is acknowledged immediately and a new tax code is issued. This starts as soon as HMRC becomes aware of the change. This is called a trigger point. Several things can trigger HMRC to jump into action: a notification from the employer (about a change in salary or a new company car, for instance) or an employee updating their personal tax account.
How the new dynamic tax codes could affect you as a taxpayer
HMRC will look at the new salary situation and calculate an estimated pay for the rest of the year, based on the salary to date including the change. The new tax code as well as the new tax due will then be calculated and applied from next month’s pay onwards.
This can lead to the following scenarios:
- If the salary is reduced, the tax will also be adjusted immediately. There’s no need to wait for a refund.
- If the pay is increased or a new car benefit added, a higher monthly tax will be applied immediately. This means that the right amount of tax is paid as soon as the circumstances change. There should be no unexpected tax bills at the end of the year.
- A problem may arise, if there was a one-off payment such as a bonus payment. The estimated pay assumes that the increase is permanent. This could lead to a higher estimated monthly salary with a higher tax bill.
- If a taxpayer is still paying off an underpayment from last tax year, they could be hit twice if they also have an increase in their tax due for this year.
If you have any questions about the new dynamic tax codes or you would like us to review this, we’re always happy to help. Get in touch by either emailing us at admin@alba.uk.com or calling us on 01509 853779.
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