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Tax Tips - September 2017

Thought you understood the tax system?…Think again…Pay As You Earn is changing…

Pay As You Earn (PAYE) is the system that allows employers and pension providers to collect the tax you owe and pass it on to HMRC. Your tax code is the way they communicate with each other. It generally works well and you will pay the correct tax every year without having to speak with anyone. However, sometimes it doesn’t work so well and overpayments and underpayments of tax occur which need to be refunded or paid. This is often because of changes during the year like changing jobs, benefits, retirement or perhaps bereavement.

Before the changes? Up to, and including, the 2016/17 tax year refunds and underpayments were notified by issuing a tax calculation called a P800 at the end of the tax year. Refunds of tax generally arrived during the summer months and underpayments would be collected via the tax code (where possible) in the following tax year. A 2016/17 underpayment would appear in a 2018/19 tax code. Where coding wasn’t possible people were issued with voluntary payment letters and a short deadline to pay. This system remains.

So what’s changing? From April 2017 HMRC can also collect potential underpayments in the year they actually happen; they call this dynamic coding. So, if there is an underpayment in this year, the computer system will work out what it will be and then add an adjustment to your tax code and spread the payment over the rest of the tax year. You will be pleased to hear that there are safeguards in place that restrict HMRC from taking more than 50% of that income source and stop them taking more than double the tax you already pay. They can also collect the amount over the next tax year if it isn’t possible to collect it all in the first year.

What happens if the tax due can’t be collected via my tax code? The law has been changed to allow HMRC to collect these underpayments using a new process called Simple Assessment. The calculation, called a PA302, can only be issued where HMRC already hold all the information required to assess your income accurately. It is a simpler process, hence the name. In the past, a P800 and voluntary payment letters were issued and where people didn’t respond, a tax return was issued.  Now you just check the figures on your 2016/17 PA302 and, if you agree, pay the tax due by 31st January 2018, or three months after the date of the assessment if it is issued after 31st October 2017. If you don’t agree, you have 60 days in which to query it.

People new to the state pension in 2017/18 who will owe tax but can’t pay via a tax code will be put straight into the simple assessment system receiving a PA302 after the end of the tax year.

People who currently complete a tax return, because it is the only way to collect the tax due on their state pension, MUST complete their 2016/17 tax return in the usual way. It is planned to bring this group of people into the new process during this year.

How to pay? HMRC prefer people to pay via their personal tax account. You can register at   or you can call, 0300 200 3300 and pay by debit/credit card. If you intend to pay by cheque you MUST, at a minimum, write the ‘Charge Reference Number’ on the back of the cheque as payslips are not being provided.

What if it causes financial difficulties? If the amount being taken is more than you can afford or you think something is wrong you should contact HMRC immediately. You can ask for an underpayment to be spread over more years. Initially, HMRC can with an underpayment over two years but once the tax year has ended they can spread them for longer periods; you will need to provide income/expenditure information for periods of 5 years or more. If you are unable to pay, ask HMRC to consider their hardship rules.

This article is by Tax Help for Older People registered charity no 1102276 (Scotland no SC045819), offering free tax advice to older people on incomes below £20,000 a year. The Helpline number is 0845 601 3321 or geographical 01308 488066.