Making Tax Digital has been pushed back to 2019, and even then it’s only relevant to certain companies, however HMRC has snuck another one of their wild hair-brained schemes under our noses, Dynamic Coding.
On the 2nd of July 2017, HMRC launched its new system called ‘Dynamic Coding’, also known as ‘PAYE Refresh’. This time, it’s a scheme aimed towards the employed and self-employed, so those of you running small business will have to pay attention!
How does Dynamic Coding Affect My Business
Dynamic Coding is HMRC’s way of changing your tax code to provide a (hopefully) more accurate tax rate. The aim of this is to put an end to taxpayers over or under paying for tax based on their income. Previously, HMRC has monitored the amount you pay on a yearly average and has changed your tax code for the following year to reflect your salary. As of July 2017, your tax code is now significantly more flexible and can change throughout the tax year.
Using Dynamic Coding, HMRC will change how much of your payslip is tax-free and how much you have to pay tax on. This is done to balance out any over payments or under payments you have made throughout the year. If you paid too much tax during the previous months you’ll receive more in tax-free allowance, whereas if you’ve underpaid you will receive a smaller tax-free allowance.
This can affect your budgeting as it makes it difficult to predict exactly how much you will receive each month from your employer. While the amount you receive may roughly be in the same area, the difference of being taxed an extra £50 can make a huge difference to an individual’s finances.
Bonuses or other temporary salary increases can also cause problems, as Dynamic Coding basis your tax code on what you’re earning on average per month. If you receive a bonus or any other kind of extra monetary gain from your employer early during the tax year, it’s quite likely that the Dynamic Coding system will take this as an ‘average’ monthly salary and will expect you to earn a similar amount for the following months. If this happens early in the year then it is quite likely you’ll receive a tax code to pay a higher amount of tax for the following months even though you’re not actually earning as much. This will of course balance out later on in the year after the Dynamic Coding system realises your actual salary, however it can cause problems in the short term.
Does This Mean We Won’t Get Tax Refunds Any More?
The aim of Dynamic Coding is to try and eliminate both tax refunds and underpayment on taxes. In theory, should the system work, then the amount of employees and businesses receiving tax refunds or demands for tax should reduce drastically. Instead of receiving a cheque in the post, you will see your tax reduced or increased on a month-by-month basis to reflect your situation.
We’re going to hold fire on saying whether we think this is a good or bad scheme. There’s certainly a lot of potential to make the tax system more streamlined, but there is also a lot of potential for things to go horribly wrong. The fortunate thing, however, is that it’s unlikely to affect your business, only your employees.
We would highly recommend hiring an online accountant to help deal with these new changes. While they may not have much to do with the workings of Dynamic Coding, they will certainly have a clear understanding of it and will be able to explain the changes in a clear and efficient way for you to understand.
For more information call 0800 0460 560