Insights

Significant changes are to come into force on 6 April 2015 to the powers HMRC has to deduct tax through the PAYE coding system from taxpayers it believes owe additional taxes.

HMRC calculates the tax codings of those who receive their income through PAYE and issues the coding to both the individual and their employer. The intention when setting the coding is to ensure each individual pays the correct amount of tax; any adjustments made to an individual’s coding by HMRC must be automatically actioned by their employer, and in this way HMRC collects the tax by way of monthly payment through the employer’s PAYE system.

Coding notices will usually include personal allowances and items such as benefits in kind; however HMRC also currently has the power to collect tax debts of up to £3,000 by adjusting an individual’s coding (known as ‘coding out’) to collect tax debt, even without the individual’s consent.

These deductions for unpaid taxes which are made through the coding out system enable HMRC, for example, to collect overpayments of tax credits, PAYE underpayments and shortfalls in self-assessment tax payments. This has long been an established method of collection of tax underpayments; however HMRC has been seeking to increase the £3,000 statutory limit in an attempt to improve the collection of debts.

As a result, new increased coding out of debt limits are to be introduced following a consultation process, with the new legislation becoming operational for the 2015/2016 tax year. This new legislation increases the amount of outstanding debt which HMRC can collect from any taxpayer.

The maximum amount of debt HMRC can automatically deduct is to be increased for those with salary levels exceeding £30,000 –taxpayers earning £30,000 or less will not be affected by the new legislation and the maximum amount which can be collected through their coding will continue to be £3,000. The increased amount which can be deducted will be based on a graduated scale according to salary levels over £30,000, subject to a maximum amount of £17,000 which can be collected through the codings of those earning more than £90,000 per annum.

Below is an outline of the new coding out debt recovery scale published by HMRC, outlining the maximum deductions which can be made – note that these amounts are subject to an over-riding limit which prevents employers deducting more than of 50% of any individual’s pay in this way

These changes to coding out notices represent a significant increase in HMRC’s powers; as deductions can be made without the individual’s consent it is important to be vigilant about any changes to your tax code, and if you have any queries, to take action quickly.

HMRC has said that any taxpayer who faces difficulties repaying tax debts through this new procedure should contact them immediately to discuss alternative payment options. For instance, it will be possible to split payments, allowing taxpayers to repay part of their debts through PAYE and the remainder through another collection method.

For taxpayers who experience changes to their income levels midway through a tax year, these will be dealt with as follows:

• Increases in income – PAYE deductions will continue as before;
• Decreases in income – PAYE deductions will continue as before unless the 50% of income restriction is triggered at which point coding out payments will cease and an alternative payment schedule will be arranged.

Employers can expect a raft of enquiries from employees when this change begins to take effect and support from a payroll provider or accountant will be essential. If you have any questions regarding the changes to coding out notices or want to discuss other aspects of your payroll system, please contact Simon Paterson by emailing sp@rjp.co.uk.