The majority of employers report errors with employee tax codes, while there can be long delays in resolving allocation of the wrong tax code at HMRC
As people start to receive notification of their tax codes for 2023/24, survey of mid-market businesses by BDO showed that 99% of employers have experienced issues with their employees’ tax codes.
More than half of employers (51%) said their staff did not understand what their tax codes mean.
The survey also found that almost the same proportion of respondents (49%) said that employees had complained about coding errors which in some cases had led to them receiving catch-up bills for unpaid tax in later years.
Almost a third (31%) pointed to problems relating to delays in the time it took to rectify incorrect tax codes with HMRC.
Each code is made up of a combination of numbers and letters, the numbers relating to the tax-free income to which the employee is entitled while the letters refer to a taxpayer’s personal situation and how it affects their personal allowance.
HMRC does provide some explanations for taxpayers but the system is complex.
Paul Falvey, tax partner at BDO said: ‘HMRC has to implement complex tax laws. The tax code system is a clever way to do that but it isn’t infallible. All it can do is impose its best estimate of tax deductions for the year. This leaves some people ending up underpaying tax and having to pay a catch-up bill: obviously, this can breed distrust in the system.
‘Tax codes aren’t simple to understand, and there is undoubtedly more that HMRC could do to help people understand why they have been assigned a particular code.’
Tax codes are complex and there are 20 letter combinations listed on the gov.uk website, with further codes (W1, M1 or X at the end) denoting emergency tax.
There is also a K code which denotes that tax due to be collected is worth more than the tax-free allowance. This can often happen when an employee has to pay tax owed from a previous year.
A common complaint cited by 38% of respondents was the erroneous or excessive use of emergency tax codes. These are applied if HMRC does not get an employee’s income details in time after a change in circumstances, such as a new job, or starting work for an employer after a period of self-employment. While these codes are temporary, they can cause cashflow problems for employees, and particularly for workers on lower incomes.
Falvey added: ‘There are things that taxpayers can do to make sure the right amount of tax is collected. We would always advise taxpayers to check their tax codes, by logging into their personal tax account. This is where you can check the estimates of how much income you’re expected to get from your jobs and pensions.
‘You can also inform HMRC about any changes that are likely to affect your tax code during the tax year. Helping HMRC to get it right means you shouldn’t have any nasty surprises later. For example, if you claim child benefit but you or your partner’s income goes over £50,000, telling HMRC straight away means that the high income child benefit charge can be collected through your tax code to avoid building up tax debts – although you will still have to report this on your tax return.
‘Common issues are around the emergency tax being applied when someone starts a new job or takes on an additional part-time job. Problems can also arise with the wrong income tax being taken from pension payments.
‘While it’s unlikely we’ll see any meaningful reform of tax codes in the near future, HMRC could probably do a better job of rectifying errors quickly so that people aren’t left out of pocket.’
The British Dental Association (BDA) has advised associate dentists to make sure that they comply with self employed rules as HMRC will remove a vital piece of guidance from April
HMRC is due to change an important long-standing piece of advice from April 2023 which means that associate dentists will have to meet off payroll working rules.
The BDA said that ‘HMRC has for many years accepted that associate dentists are almost always self-employed. Its guidance has included mention of our associate agreement in its employment status manual, but as of April, this paragraph will be withdrawn’.
From 6 April 2023, HMRC will be updating the Employment Status Manual (ESM) — ESM4030 to remove specific occupational guidance for associate dentists.
The majority of dentists work as associates, and appear to fall outside of IR35 rules as they pay to use the facilities at the practice, can choose what hours and when to work, and practices cannot tell them how to do their jobs or what type of work to undertake. In addition, professional development, specialist training, registration and indemnity insurance is self-funded.
Currently associate dentists, who use facilities in a dentist practice but are not hired staff members, can reporting earnings as trading income and not as employment income. In these circumstances the dentist is liable for Class 2/4 NICs and not Class 1 NICs. They also do not need to establish IR35 status, but this is set to change, despite claims from HMRC that nothing ‘has changed’.
HMRC said: ‘There has been no change in the rules and removing ESM4030 does not mean we have changed our view on the employment status of associate dentists.
‘In future however, we are asking associate dentists, or those who engage associate dentists, to make an assessment of employment status in the same way as other customers in the dental sector and elsewhere. Check Employment Status Tax (CEST) tool offers a quick and easy way to do this.’
So far, the British Dental Association believes that the removal of the paragraph from the guidance will not affect the status of associate dentists, but it appears that HMRC is expanding the focus of the off payroll rules for the private sector, although it will not open retrospective enquiries into previous practice.
In a statement the BDA said: ‘The withdrawal of this guidance will have no impact on the self-employed status of individual associate dentists. HMRC has told us that this is a change to their guidance, not a change to the self-employed status of associates. They have simply stopped referring to third party advice in their own guidance.
‘The National Association of Dental Accountants and Lawyers, the experts on the dental sector, also believe that the change in guidance will have minimal impact. Furthermore, HMRC will not be using the withdrawal of the guidance as a reason to open retrospective enquiries into periods prior to 6 April 2023.’
However, the BDA said that dental practices should review their associate arrangements.
‘It is vital that practice owners and associates are prepared for the different HMRC approach, which means being aware of the issue and understanding what factors make an associate employed, and those that lean towards self-employment.
‘HMRC will no longer simply accept that an associate is self-employed if engaged on a BDA contract and the terms are being followed. The practice owner will need to demonstrate self-employment for both new and existing associates using the normal status tests,’ the BDA said.
There are an estimated 42,200 dentists registered in the UK.
HMRC has issued a reminder to millions of married couples to make sure they are claiming the £1,260 marriage allowance tax break
While more than 2.1 million couples claim marriage allowance, HMRC estimates that up to 2.4m couples are missing out because they do not realise they may be eligible, particularly couples where one partner has retired, has given up work to take on caring responsibilities, or is unable to work due to a long-term health condition.
All claims should be made on HMRC and do not use a third party provider as they will take a large cut of the allowance through commission fees.
Marriage allowance is worth up to £252 a year, equivalent to around 10% of an individual’s tax-free personal allowance. The maximum amount that can be transferred to their husband, wife or civil partner is dependent on the personal allowance for that tax year.
It is worth noting that claims can be backdated to April 2018.
Taxpayers earning less than £12,570 a year can transfer up to £1,260 of their personal allowance to their higher earning partner, to reduce the amount of tax they pay. They can backdate their claim to include any tax year up to 6 April 2018, which could be worth up to £1,242 in tax relief.
Trusha Shah, tax manager at HW Fisher said: ‘It might not be the most romantic reason to propose, but there are tax benefits to consider if you are getting married. Eligible married couples, or those in a civil partnership can reduce their tax by up to £252 via the marriage allowance.’
Couples can use the marriage allowance calculator on gov.uk to check if they are eligible for the tax break.
Angela MacDonald, HMRC’s deputy chief executive, said: ‘We want every eligible couple to benefit from marriage allowance tax relief. Couples whose circumstances have changed – perhaps one of them has stopped working or taken a lower paid job – may not realise they are entitled to claim.
‘It’s easy to find out what you may be due – search ‘marriage allowance calculator’ on gov.uk to get started. By applying on gov.uk, rather than through a third party, you get to keep 100% of the tax relief due.’
Couples could claim marriage allowance if the following criteria applies:
- married or in a civil partnership;
- do not pay income tax, or their income is below the personal allowance of £12,570;
- their partner pays income tax at the basic rate – which typically means their income is between £12,571 and £50,270.
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Married allowance can be cancelled on gov.uk if a couple’s circumstances change.
ICAEW is warning taxpayers to check their national insurance (NI) record before 5 April 2023 when the government is reducing the window for topping up contributions
Currently, voluntary contributions can be made to plug gaps back to April 2006, but this will be curtailed from April.
Normally, it is only possible to make voluntary contributions for the past six tax years. Currently there is an extension in place so individuals can fill gaps in their NI history from 6 April 2006 to the present date by making voluntary contributions.
However, from 6 April 2023, the timeframe for making voluntary contributions will revert to the normal six years. This means that in the 2023/24 tax year, it will be possible to make contributions going back to the 2017/18 tax year only.
Contribution levels affect the level of state pension paid to retirees.
National insurance contributions are typically made by employed and self-employed individuals based on their earnings. Individuals may also receive NI credits if they are eligible. These NI contributions or credits make up a person’s NI history, which may affect their entitlement to the state pension as well as other benefits, such as employment and support allowance.
In general, to qualify for the maximum ‘new state pension’ (received by those retiring on or after 6 April 2016) a person must have 35 qualifying years of NI contributions. For part payment of the ‘new state pension’ a person must have contributed for at least 10 years.
For those whose NI record started before 6 April 2016, different rules may apply; the number of required years of NI contributions/credits to obtain the full state pension may be higher.
ICAEW warned: ‘If individuals have not contributed enough prior to reaching state pension age, they may not be able to claim state pension, or receive the full state pension amount.
‘To protect state pension and other benefits it may be beneficial for people to make voluntary NI contributions to top up their contribution history, potentially increasing the amount of state pension they will receive. Specific financial advice is recommended when making that decision as it requires predicting, to an extent, what contributions will be made before state retirement age and the risk of future changes in the rules.’
Taxpayers should also check that their record includes NI contributions paid through PAYE or self assessment, and NI credits earned. They should contact HMRC to have any errors corrected.
Actions for taxpayers to take before 5 April 2023:
- check your NI record
- identify any discrepancies between NI contributions paid and those showing on HMRC’s system;
- identify any NI credits that are missing from periods in which they should have been received (eg, on receipt of universal credit or child benefit);
- Identify any shortfalls in contributions;
- contact HMRC if you think there are any errors; and
- decide whether to make voluntary NI contributions.
HMRC will raise interest rates on tax debt to 6.5% from 21 February following latest increase in base rate
The late payment and repayment interest rates applied to the main taxes and duties that HMRC currently charges and pays interest on will rise to:
- late payment interest rate — 6.5% from 21 February 2023
- repayment interest rate — 3% from 21 February 2023
This means that the late payment interest rate will increase by 0.5% to 6.5% from 21 February. The rate last increased to 6% on on 6 January. This is the highest rate since the start of the financial crisis in November 2008.
Late payment interest is payable on late tax bills covering income tax, National Insurance contributions, capital gain tax, stamp duty land tax, stamp duty and stamp duty reserve tax. The corporation tax pay and file rate also increases to 6%.
Repayment interest will also be increased from the current 2.5% rate to 3%.
Corporation tax self assessment interest rates relating to interest charged on underpaid quarterly instalment payments rises to 5%.
The interest paid on overpaid quarterly instalment payments and on early payments of corporation tax not due by instalments rises to 3.75%.