Appendix 5 Net of Tax Credit Scheme and Dynamic Tax Codes: HMRC are now reacting to the problem

Further to our earlier blogs on this area, AAB’s Carol Sim is pleased to provide a positive update on the issues created by HMRC’s changes.

Since July, HMRC have introduced a new system that automatically updates an individual’s tax code where they are aware, via employers RTI payroll reporting, that there has been a change of circumstances impacting on an employee’s tax position.

This real time adjustment in tax codes generally helps tax payers. By picking up on underpayments of tax quickly, changes can be implemented to phase in any amounts due gradually, thus avoiding peaks and troughs in tax payments and consequently, net pay. However, this new process has its limitations and does not have automated signals built into the system to deal with employees who have paid less UK tax than would typically be expected because they have paid foreign tax instead. AAB highlighted this issue to HMRC who now recognise the problem and that these changes had not considered the impact to employees with net of tax credit, and have now put in place a plan to deal with it.

HMRC are in the process of writing to all employers who they know operate an Appendix 5 Net of Tax Credit Scheme requesting that they provide an updated schedule of the names and National Insurance numbers for all employees who are currently part of the scheme. Alongside this, the “Appendix 5” department within HMRC have deployed extra resources and are currently updating the relevant records they already have to manually set temporary signals on “Appendix 5” employees records to prevent the automatic tax code adjustment taking place in the future.

Therefore, it is very important that employers respond promptly to any request from HMRC for an updated schedule of employees included on an Appendix 5 arrangement. Employers should note that it is part of the conditions of the scheme that they would have been issued with when the scheme was granted, that such a schedule is submitted to HMRC on a regular basis. Therefore employers should not necessarily be waiting on a letter from HMRC before they submit a schedule. We would recommend that they are proactive and regularly submit this information to HMRC without prompt. Making sure the relevant information goes to the correct department at HMRC is always a challenge and we would recommend that all schedules are headed up “EP Appendix 5 Team” to help the schedule get to the correct place.

If you have any queries on correspondence received from HMRC or how your net of tax credit scheme operates generally, please don’t hesitate to contact us.