As a result of the introduction of the RTI reporting system for PAYE, and some false assumptions made by HMRC in that system, many thousands of employees have been issued with incorrect PAYE codes. HMRC has advised affected employers to disregard them.
So what is the problem, and how do you know when to ignore a coding notice?
Many employees who normally have their tax code restricted for benefits in kind have been given full allowances, while others have been issued with a code BR (ie, a flat basic rate, with no allowances) or code D0 (a flat 40% rate, with no allowances). Both will result in incorrect tax deductions.
Both issues have been caused by the starter and leaver processes.
Missing benefits in kind restriction
All employers had to go through a process of aligning their employee records with HMRC’s system at the very start of their operation of RTI reporting. Large employers did this by making an Employer Alignment Submission (EAS) before they submitted their first Full Payment Submission (FPS). Smaller employers simply submitted their first FPS, which HMRC checked against its existing records of employees on that employer’s payroll.
HMRC expected all employers to include all their employees on either an EAS or the first FPS, but some employers did not do so. Where the EAS was submitted in parts, without being flagged as a series of part-submissions, or where the first FPS included only those employees who were paid on that date, rather than all employees, any employee records that were not on the first EAS or first FPS were treated by HMRC as having ceased employment at 5 April. This deleted the record of the benefits restriction to their tax code.
When these employees were subsequently paid for the first time under RTI, and appeared on a later FPS, they were incorrectly treated by HMRC as new starters, with no history, so a new code was issued automatically, with no restrictions.
Some employees leave their job without the employer knowing – e.g. a casual worker who is paid at the end of a shift will often be paid in cash at that point, without committing to come back for another shift later. The employer expects him or her back, so the last payment is not flagged in the
RTI report as a final payment to a leaver. When the employer finds out that the worker has in fact left and will not be paid again, there is no RTI mechanism for flagging that worker as a leaver without making a new payment, which is unlikely to happen. Under the old regime, employers could submit a late P45, but that does not exist under RTI.
So, as far as HMRC knows, the employee is still on the ‘old’ payroll with a personal allowance, but he or she can’t be ‘ceased’ by the employer without making a new payment. When the HMRC computer finds the employee appearing on an FPS from a ‘new’ payroll on a different PAYE reference, while still listed under the old reference, it assumes the worker has two jobs and issues a BR or D0 code for the new job, rather than transferring the old code.
Something has also gone seriously wrong with HMRC’s base data file. Some employers are reporting a large part of their workforce receiving BR or D0 codes, which is clearly not a result of unrecognised leavers. Employees are reporting receiving new tax codes for jobs they left years ago, before RTI was even a gleam in HMRC’s eye, while in the same mail delivery they receive another code – BR or D0 – for their current and only job. Tax is being overpaid by a lot of people as a result.
Employers and payroll bureaux are not sent details of how codes are calculated, so the response to a new coding notice may not be as simple as disregarding it.
Where the tax code is obviously wrong, and an employer or employee spots the problem, the employee will have to contact HMRC. HMRC will only speak to an employer to confirm whether a code has been issued and whether it can be ignored, but the employee’s personal details and the individual numbers underlying the code are confidential.
Of course, it may not be obvious that a code is wrong, and a busy payroll team may just process code changes as they are notified, and a payroll bureau has no authority to disregard a code issued by HMRC.
Employees who normally receive P11Ds showing benefits should be warned to check carefully any new PAYE code issued. Any new BR or D0 codes should be queried by the employee unless they are expected.
For further information
There is guidance on tax codes on HMRC’s website at: http://www.hmrc.gov.uk/incometax/tax-codes.htm
HMRC’s employee helpline number is 0845 300 0627. The caller will need his or her NI number.
HMRC’s employer helpline number is 0300 200 3200. The caller will need the business’s employer PAYE reference number.