Code quirk can lead to being taxed twice
Taxpayers could lose their personal allowance or end up paying tax twice thanks to teething problems with HM Revenue & Customs’ digital systems.
While the Making Tax Digital campaign, the Government’s attempt to bring its systems up to date, has largely been halted amid Brexit negotiations, cracks are beginning to appear in the changes already made.
Using “dynamic coding”, introduced last year, HMRC now updates tax codes throughout the year in order to address any under or overpayments.
This is meant to reduce instances of taxpayers overpaying and having to wait until the end of the tax year to receive a refund, as the adjustments can be made immediately.
But tax practitioners say a number of people are facing problems. If you receive a large bonus early in the year, HMRC’s system extrapolates that bumper paycheck across the year and massively overestimates the person’s annual income.
If the figure surpasses £100,000 the person’s tax-free allowance of £11,850 will be reduced or eliminated entirely – leading to overpayments.
HMRC said this wasn’t a problem only with dynamic coding, as it could have happened before, but the new system means the problem arises instantly.
Helen Thornley, of the Association of Taxation Technicians, said: “We’ve heard of this happening to quite a few people.
“The UK’s tax system is so complicated that this process would need to be very complex to deal with everything. To be fair to HMRC, it doesn’t design the rules and the principle of dynamic coding is a good one. But it needs to work.”
To fix the problem, taxpayers need to log on to their online “personal tax account” and suggest a change to estimated income.
An HMRC spokesman apologised to customers who had been affected.
Separately, some taxpayers are at risk of being billed twice due to a clash between the new digital system and self-assessment.
People who underpaid tax in 2017-18 will already have repaid the sum, thanks to dynamic coding. But accountants warn that if that person needs to declare additional income, their tax return could be prepopulated by HMRC and include the underpayment. If a taxpayer doesn’t correct it, they could pay twice.
HMRC’s spokesman apologised for out-ofdate information on some returns but added that no tax had yet been asked for. Following Telegraph Money’s inquiry, the accounts affected are being updated.
Dynamic coding was introduced last summer and was hailed by Mike Potter, HMRC’s digital chief, as the “biggest change since Pay As You Earn was introduced in the Forties”.
Iain McCluskey of PwC, the accountancy firm, said: “This is a big transformation – the simplification of our tax system affects everyone. The direction of travel is absolutely right, but where these bumps in the road do happen, HMRC needs to deal with them properly.”
Taxpayers should not assume that digital tax always adds up