Errors with HMRC’s dynamic coding system could lead to double taxation

MD Consulting are warning our clients to watch out for flaws in HM Revenue & Customs’ (HMRC) ‘dynamic coding’ system which, in some cases, can end up in double taxation.

In fact, taxpayers could potentially lose their personal allowance or end up paying tax twice because of ‘early cracks’ in HMRC’s digital systems, it has recently emerged.

What is dynamic coding?

The tax authority first introduced ‘dynamic coding’ in 2017. The process effectively sees tax codes updated throughout the year, rather than at year-end, in a bid to address any under or overpayments.

What are the problems?

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

However, if someone receives a large bonus early in the year, the system appears to use that as an ‘average’ for the year and therefore massively overestimates the person’s annual income, tax bodies such as the Association of Taxation Technicians (ATT) have warned.

If that figure is more than £100,000, then the person’s 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 as soon as they can.

Other issues…

Meanwhile, another potential problem for taxpayers is that 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, therefore it is important to rectify the problem as quickly as possible.

To find out how MD Consulting can help, please contact us.

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