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‘Dynamic coding’ could have led to double taxation

Mark Hildred, Managing Partner

Tax bodies such as the Association of Taxation Technicians (ATT) suggest that taxpayers could lose their personal allowance or end up paying tax twice because of early cracks in digital tax systems. <1--more-->

HM Revenue & Customs (HMRC) introduced ‘dynamic coding’ in 2017, which means that tax codes are updated throughout the year, rather than at year end, in a bid to address any under or overpayments.

This was meant to be an advantage for taxpayers, as the system should have reduced instances of overpayment as it allows for any adjustments to be made immediately.

However, if someone receives a large bonus early in the year, the system uses that as an average for the year and massively overestimates the person’s annual income. If that figure is more than £100,000, then their tax-free allowance would be reduced or eliminated entirely.

While there has always been a potential problem with paying income tax, using dynamic coding means that the problem arises instantly rather than at the end of the year. If a taxpayer is affected at any point in the year, they need to log on to their online personal tax account and suggest a change to their estimated income.

Meanwhile, another potential problem for taxpayers is they could be at risk of being billed twice. For example, someone who underpaid tax in 2017-18 because they changed jobs will have already repaid the tax.

However, if that person then needs to declare additional income, their tax-return could be pre-populated by HMRC and include the underpayment. If the taxpayer does not correct this, they could end up paying twice.