HMRC And The Art Of Reactive Tax Codes |
Be sure to check for W1 M1 ... |
POSTED BY ALISON MEAD ON 22/10/2018 @ 8:00AM
In April 2017, HMRC introduced reactive tax codes which mean that if changes occur in your income, your tax code is likely to be changed more quickly than in the past ...
Reactive Tax Codes are being used by HMRC with W1 M1 designation!
This has been made possible since Real Time Information (RTI) was introduced, which means employers tell 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?"
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, their tax codes changed by 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 which could be a W1 if you are weekly paid instead. 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, 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 changed re-actively before the January pay run, and those that paid too much tax got 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.
"So, what's 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 your pay unexpectedly changes or your employer decides to pay you a bonus.
"Would you like to know more?"
If you'd like to find out more about reactive tax codes and what to watch out for during your payroll run then do give me a call on 01604 420057 or click here to ping me an email and let's see how I can help you.
Until next time ...
ALISON MEAD
I'm your Bookkeeping Buddy: Discover more by clicking here!
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