HMRC introduced Dynamic coding on 2nd July this year as part of making tax digital (MTD). The idea is HMRC uses third party information more efficiently, such as bank interest and RTI submissions from payroll data.

RTI information has been supplied to HMRC for a number of years but it has not been used up until this point to alter coding notices. The concept is that taxpayers should pay the correct amount of tax each year by adjusting their codes as necessary to deal with underpayments or overpayments in the current year. It means taxpayers who have overpaid tax won’t have to wait until the end of the tax year to claim a refund. The idea being that less P800’s are issued at the end of the tax year as your tax should already be correct.

Unfortunately this will mean that other taxpayers will pay tax quicker and at times significantly more tax will be paid rather than it being coded over the following year. HMRC will attempt to recover all of the tax due by the end of the current tax year.

An example of this is when a medical benefit is reported to HMRC, it would normally be coded from the point of notification to HMRC.

From 31st May, HMRC will try to recover all the tax due on a benefit from the point they are notified until the end of the tax year. Underpayments for 2016/17 will be collected by being included in tax codes immediately, rather than from the start of 2018/19.

This will mean some taxpayers will have double tax to pay as 2015/16 underpayments are already included in tax codes for 2017/18.

These changes will mean that more tax codes are issued each year to continuously try and ensure that the tax paid each year is correct. HMRC has assured employers that no more than one tax code change will be issued per month per employee.

As per the current system only the taxpayer will receive the breakdown of their tax code. It is recommended that taxpayers set up a personal tax account using the government gateway to monitor their tax codes. This gives taxpayers the opportunity to immediately check and query any codes issued, as well as checking income amounts reported by third parties.