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24th May 2024

How and why tax codes change

As an employer, understanding why your employees' tax codes might change is essential for ensuring accurate payroll management and compliance with HMRC. Changes in tax codes can occur due to various factors, and it's advised to stay informed to avoid potential errors and penalties. Changes in tax codes can occur due to various factors, ranging from additional sources of income to alterations in state benefits or pension amounts. Find out the key reasons behind tax code adjustments and how PayEscape can assist in managing these changes effectively below.

Why tax codes change

1. Additional sources of income

When an employee starts earning income from an additional job or pension, their tax situation becomes more complex. HMRC adjusts their tax code to account for this additional income and ensure the correct amount of tax is deducted each month. When you are hiring staff it is always a good start to see if your potential employee has more than one job, benefits or income to determine how much tax they need to be paying.

2. Changes in state pension

Fluctuations in State Pension amounts can trigger adjustments in tax codes. Whether the pension amount increases or decreases through governmental changes, HMRC recalculates the tax code to reflect the new income level accurately. This is why it is important to have an up to date payroll provider to manage any changes that may affect your employee’s tax rates. Overpaying or underpaying tax can result in a stressed and unhappy member of staff which may lead them to look elsewhere.

4. Taxable benefits

Certain benefits are taxable, such as Jobseeker's Allowance or Incapacity Benefit. If an employee begins receiving taxable state benefits or if the benefit amount changes, HMRC adjusts their tax code accordingly.

5. Claiming marriage allowance

Employees who are married or in a civil partnership may be eligible to claim Marriage Allowance, allowing them to transfer a portion of their personal allowance to their partner. Claiming Marriage Allowance can result in changes to tax codes for both partners. Talk to a payroll expert today if you need further advice on claiming marriage allowance and how it impacts your tax.

6. Claiming tax-relief expenses

Employees who claim expenses eligible for tax relief, such as work-related travel expenses or professional subscriptions, may see adjustments in their tax codes. HMRC accounts for these deductible expenses to ensure employees receive the appropriate tax relief. Most employees pay tax-relief expenses separately from an employee's monthly salary to avoid changes to the tax code. 

7. Emergency tax code

When an employee changes jobs or starts a new job without a P45 form, they may be placed on an emergency tax code. This temporary code ensures tax is deducted until HMRC can issue a correct tax code based on the employee's circumstances.

How often do tax codes change?

Tax codes can change whenever there's a significant alteration in an employee's circumstances, such as starting a new job, receiving additional income, or claiming tax-relief expenses. However, they can also remain unchanged for long periods if there are no significant changes in the employee's situation.

Can employees check their tax codes?

Yes, employees can check their tax codes through their personal tax accounts on the HMRC website or by contacting HMRC directly.

What if an employee's tax code is incorrect?

If an employee believes their tax code is incorrect, they should notify their employer, who can then liaise with HMRC to rectify any discrepancies. PayEscape's payroll reporting features can assist employers in identifying and resolving tax code issues promptly.

How PayEscape can help you manage tax changes

At PayEscape, we streamline payroll processes, ensuring accurate tax calculations and compliance with HMRC regulations. Our payroll software automates tax code updates based on employee information, reducing the risk of errors and ensuring employees are taxed correctly.

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