UK: HMRC Advises Employees to Check Code Numbers
UK: HMRC Advises Employees to Check Code Numbers
The amount of income tax that an employer withholds under the U.K.’s Pay-As-You-Earn (PAYE) system from an employee is determined by the amount of payments made and a PAYE code number issued by Her Majesty’s Revenue & Customs (HMRC). HMRC is currently issuing the PAYE codes for the next U.K. tax year which begins on 6 April 2010. This year’s issue of code numbers has had a number of problems and employees are urged by HMRC to check their PAYE code numbers carefully so that they do not experience excessive withholding.
Incorrect Withholding
The problems that are occurring include (but are not restricted to):
• Employers have been receiving two different PAYE code numbers in respect of one individual that were issued on the same day. Employers may not know which code to use and need to contact the relevant tax office.
• Code “DO” being issued incorrectly when the correct code would have been “OT”. Code DO results in flat rate withholding of 40 percent, while code OT would authorize withholding at the correct graduated rates from 20 percent to 50 percent.
• Incorrect allocation of tax-free allowances between sources of income because old sources of income have been taken into consideration. This particularly affects individuals who work and also have a pension from an old employer.
The Causes
The problems associated with this year’s issue of code numbers are due to:
• A new computer system which has been introduced that combines a number of previously separate records into one PAYE record per employee. More code numbers are being issued automatically, which should be more efficient in the longer term, but in the short term is highlighting errors in the data held.
• Changes to the remittance basis of taxation, meaning that more individuals do not have personal allowances and are, therefore, not on a standard PAYE code number.
• The phase-out of personal allowances for higher-rate individuals again resulting in more people without a standard PAYE code number.
Because of problems with code numbers issued this year, employees should check their PAYE code numbers carefully – there may be cases of excessive withholding.
Employees Not Affected
Employees on assignment in the U.K. who are tax equalized and included in a modified payroll scheme are not affected by these problems because these schemes do not have PAYE code numbers issued by HMRC.
KPMG Note
Employees should carefully check any PAYE code numbers issued to establish that they are not subject to excessive withholding during the U.K. tax year commencing 6 April 2010. If they act quickly, there is still time to correct the position before the start of the next tax year.
Employers will also be inconvenienced by the number of cases where two codes have been issued on the same day for the same employee. Employers will not know which code number to operate and will have to contact HMRC.
Source: KPMG
