PAYE and Making Tax Digital
HMRC’s Making Tax Digital project is about to make inroads into the PAYE and payroll systems. Employers will see an increase in the number of tax codes being issued during the tax year.
Since 1944 PAYE and the tax code has been a means of spreading an employee’s tax liabilities over the tax year and allowing the amount of tax deducted to vary with variations in weekly or monthly income.
PAYE now applies to around 41 million individuals – around eight million have either over or underpaid tax at the end of the financial year.
What is changing?
The use of the Real Time Information system by employers means HMRC receives digital employee data as soon as they have been paid.
According to HMRC:
- Millions (of taxpayers) will pay less tax on a monthly basis by the end of the tax year because we will catch any overpayments sooner and prevent them from building up.
- A smaller number, who previously would have had an unexpected bill at the end of the year, will pay the right tax from the moment their circumstances change, so they will be able to manage their tax payments better.
Does an employee have to do anything?
No, not in the short term. When HMRC is aware of a change in an individual’s circumstances, it will issue a new tax code and will write to the employee and employer (and advise a payroll agency by digital means if applicable) regarding the change.
If employees don’t understand the change, the letter from HMRC will encourage them to use their Personal Tax Account. This is where the Making Tax Digital project comes in. Personal Tax Accounts have been linked to HMRC internal systems so that they will be pre-populated with income and tax details that HMRC already hold. This includes employment income, PAYE and NIC and any state retirement pension.
From April 2018, it is intended that interest paid by banks and building societies will be included in digital tax accounts. In order for this to happen, banks and building societies will be required to provide information to HMRC earlier, and more frequently, than currently. Taxpayers will also be able to report any additional sources of income through their digital tax accounts in 2018.
Does an employer have to do anything?
Employers will see an increase in the number of tax codes being issued during the tax year but the way they are received does not change. The revised tax codes need to be applied before the next payroll is run.