It came to light, late last tax year, that HMRC had data problems and that a number of incorrect PAYE tax codes were being issued. HMRC issued updated guidelines in February and April 2010. They indicated that, although good progress was being made, P9’s were still in the process of being issued, and some April codes were going to be incorrect, either because they had not yet been amended or may have been issued incorrectly in the first place.
It's clear that HMRC are working to rectify the situation and it should be resolved in a few months, but tax under or over payments may have occurred by then. Therefore, HR professionals, who may well be approached by individuals for advice on the changes to their tax, should be keeping an eye on tax codes for the next few months to come.
Tax free allowances have not changed between this year and last year, so in theory, if the circumstances for the individual have not changed and they are not earning more than £100k per year, their tax code should be the same as last year.
If a change in tax code (a P9) had been received, then this should detail how the tax coding has been determined. It usually starts with tax free pay allowances of £6,475 which is then reduced by either taxable benefits that the employee has received (for example, if the individual has a company car or medical insurance paid by their employer) or if they have received taxable income (for example, for interest on savings). These amounts reduce their taxable free pay allowance and indicate how the tax coding is reached.
Most people are probably aware that from this year tax is due at the rate of 50% on earnings over £150,000 per annum. Some may also be aware that HMRC is removing £1 of tax free pay for every £2 of taxable pay over £100,000. That means anyone earning between £100,001 and £112,950 should expect to have their tax coding changed.
But again, there is an element of complication here that HR professionals should be aware of. HMRC are basing 2010/11 Tax assessment figures on earnings from 2008/09, as this is the last date that HMRC held up to date P60 figures for. So, if an individual’s annual taxable pay has changed since then, the tax coding issued is not likely to reflect current circumstances. In the situation where, for example, an individual earned £90k basic and £25k bonus in 2008/09, their tax code should be reduced to a zero tax-free allowance in 2010/11. However, if the individual is not receiving any bonus this year and their earnings are still less than £100,000, they will still be entitled to the full tax free allowances for 2010/11, but may well have to wait until the end of the tax year before receiving them.
Conversely, if they earned £90,000 in 2008/09 with no bonus, then they will receive full tax free allowances this year. If their salary has subsequently increased to £115k, then they will owe tax on the £6,475 (x 40% = £2,590) and may well receive a demand for this at the end of the tax year.
Recent experience suggests that this is likely to be the case, as HMRC seem to have changed relatively few tax codings to the ‘zero allowance’ band and individuals should expect an adjustment, possibly including a demand, upon submitting their tax return for 2010/11.
HMRC will no doubt sort this issue out but in the interim it’s important that HR professionals stay abreast of the situation. If you are approached by an individual who has had their tax code changed this year, you should be able steer the individual through the change to ensure they are not over or under taxed.
Looking forward, the recent budget has confirmed that, for 2011/12, there will be no simplification of tax legislation and the top rate 50% tax banding is, for the time being at least, here to stay. It was also confirmed that, although the normal single person’s tax free earnings allowance would be increasing by £1000 to £7,475, the higher rate earner would see no actual benefit from this increase as the 40% band is being reduced so that it kicks in at £34,900 compared with the current allowance of £ 37,400. This is expected to pull an extra 700,000 employees into the 40% higher rate tax bracket. It remains to be seen what happens to bandings and whether any "fiscal drag" is involved to increase Tax in real terms.
Add to this the still planned increase of 1% to National Insurance contributions from 2011/12 and the normal employee is even more incentivised to keep a close eye on what is happening to their payslip.
Lee Hornsey, client payroll manager at Capita HR Solutions