HMRC are beginning to introduce new and innovative ways in which to deduct tax from employees’ pay. One of these is dynamic coding, which started in the current tax year. Under dynamic coding HMRC uses third party information to adjust tax codes as soon as they become aware of a change in the employee’s circumstances. This results in tax being collected earlier from the employee’s pay.
From 6 April 2017, HMRC have also introduced legislation for Optional Remuneration Arrangements. This legislation largely withdraws the tax and national insurance advantages of salary sacrifice arrangements.
In July 2017 HMRC launched a new system for amending and updating employees’ tax codes. The new system is called dynamic coding (also know as “PAYE Refresh”).
Under dynamic coding HMRC will use third party information to adjust tax codes as soon as they become aware of a change in the employee’s circumstances. The tax code will be adjusted in the same tax year as the change arises. In the past, any potential under or over payment would have been reflected in the tax code for the subsequent tax year.
This new system is beneficial for a taxpayer who is due a tax refund. Previously, they would have had to wait until after the end of the tax year to receive their refund. They will now receive the refund in the current tax year. However, taxpayers who owe more tax will have this collected earlier as it will now be collected in the current tax year rather than being coded for collection in the following year’s tax code.
HMRC’s aim is to ensure that employees are paying the right amount of tax during the relevant tax year. However, for this first year of dynamic coding some taxpayers may be hit by having two years of prior year underpayments collected in 2017/18 as underpayments for both 2015/16 and 2016/17 may be collected in the 2017/18 tax code.
The tax code will only be amended if there is a trigger to tell HMRC that there has been a change. For example, a change may be notified on payroll reports submitted by the employer under RTI (“Real Time Information”) or by the employer submitting a P46(car) to notify a new car benefit. The employee can also trigger a change themselves by updating their online tax account.
Employers are obligated to use the tax code that they are given by HMRC, even if they know that it is incorrect. In order to minimise errors that may arise, it is recommended that employees check their tax codes regularly and notify any errors to HMRC via their online tax account or by calling the HMRC helpline.
Optional Remuneration Arrangements
Prior to 6 April 2017, employees could benefit from tax and National Insurance Contributions (NICs) advantages when they gave up the right to an amount of earnings in return for a benefit. They would have paid less income tax and NICs on the benefit than if they had been paid entirely in cash.
From 6 April 2017, these advantages have been largely withdrawn. HMRC has introduced new legislation for Optional Remuneration Arrangements, or “OpRA’s” (the new name for Salary Sacrifice schemes). Under this legislation benefits provided under ‘optional remuneration arrangements’ no longer have the income tax and NICs advantages previously available under salary sacrifice arrangements. This applies to benefits in kind with a cash allowance option and to flexible benefits packages with a cash option.
A benefit is provided under an optional remuneration arrangement if it is provided under an arrangement in which:
- a) in return for a benefit, the employee gives up the right, or the future right, to receive an amount of earnings (for example salary) which would be chargeable to tax, or;
- b) the employee agrees to be provided with a benefit rather than an amount of earnings (for example the option of a cash allowance).
If the employee chooses a benefit instead of some form of cash payment, then the taxable value of the benefit is the greater of:
- the amount of cash pay given up, and
- the taxable value of the benefit under the normal benefit in kind rules.
Transitional provisions apply for a limited period and certain benefits are excluded from this change.
Under the transitional provisions, most arrangements entered into before 6 April 2017 will continue to be subject to the pre-2017 benefit valuation rules until the earlier of 6 April 2018 and variation, renewal or modification of the arrangement. However, where the benefit is the provision of a car with emissions of more than 75g CO2/km, living accommodation or school fees the transitional rules apply for a longer period. The new rules will not apply to these types of benefits until 6 April 2021.
Certain benefits are specifically excluded from the scope of the new rules, for example:
- payments by employers into registered pension schemes;
- childcare vouchers, workplace nurseries, and directly- contracted employer-provided childcare;
- bicycles and cyclist safety equipment (including cycle-to-work);
- ultra-low emission cars (ULEVs) with CO2 emissions of no more than 75g/km that are in the scope of the car benefit charge
The purpose of this new legislation is to remove the tax advantages previously available under Salary Sacrifice schemes.
The S4B Team
We are a team of Chartered Accountants based in Maidenhead. We help our clients to implement the latest developments in taxes. Send our team an email at firstname.lastname@example.org or call 01628 623444 to see how we can help you.