Reactive Tax Codes
Since April 2017 HMRC have introduced reactive tax codes, which means if changes occur in your income your tax code is likely to be changed more quickly than in the past. This has been made possible since Real Time Information was introduced, which means employers tell the HMRC exactly what staff have been paid before every pay run.
This should be a good thing, so if you overpay tax you will get a rebate quicker through your PAYE scheme, or equally if you owe more tax you can pay it off as you go through your payroll so you get no nasty surprises in the future,
What can this mean to your pay?
These new more frequent changes to tax codes can have an unforeseen impact on your taxes too.
A particular example I have seen was after the P11D (summary of expenses and benefits) was submitted for a client who gives their staff a healthcare subscription as a benefit, this changes their tax codes by just a small amount from 1050L to 1048L to allow them to pay tax on the benefit to the value of the healthcare subscription, however the new tax code this year had a pesky M1 at the end of it (this could be a W1 if you are weekly paid). The W1 or M1 means your tax is not being calculated on the usual cumulative method, but each month is looked at independently.
This isn’t so bad if you are paid the same amount every month, but as soon as you receive a one off bonus then it can make you pay way too much tax. In the case I saw a generous Christmas Bonus to staff ended up with almost 50% going to the tax man rather than the staff members.
The staff members had to each individually call the tax office to query the tax code change, which was changed re actively before the January pay run, and those that paid too much tax have now had it back in their January payslip. One staff member was told by the HMRC that using the W1 or M1 on changed tax codes was a new policy introduced recently by the HMRC.
Check your Tax Code
So the moral of this story? Pay attention to your tax code – when a change is made make sure you understand why, and if you see a W1 or M1 on your payslip then call the tax office and see if you can get it removed, or you may end up paying too much tax if you pay unexpectedly changes, or your employer decides to pay you a bonus.
If you are a bookkeeper or process payroll and want to learn more about processing with Sage 50 or Xero software then get in touch as Alison at Silicon Bullet is Xero and Sage Accredited in Payroll and Accounts.