What is an Emergency Tax Code?
If you receive an abnormally large pay packet due to bonus’ or share incentives, often people are annoyed when HMRC take an abnormally large amount of tax from that salary. As a precautionary measure, HMRC will tax that month’s salary as though it is your standard monthly wage and take more money than they should. This is known as an emergency tax, which is issued when HMRC holds insufficient information about your income and tax details for the tax year.
In that case, you will be issued a temporary tax code due to non-availability of the correct tax code. Your employer will use this code to determine how much tax is going to deduct from your wages. These codes are applied as temporary codes to your salary automatically by HMRC.
When will you get an Emergency Tax Code?
Of course, nobody wants to be taxed more than what is necessary but there are a number of situations in which you may receive an emergency tax code. You may be put on an emergency code:
- If this is your first job
- If you started a new job after being self employed
- If you started or stopped getting benefits from your job
- If you receive taxable state benefits
- If you don’t have a P45 statement with you
- If you claim marriage allowances or expenses on which you get tax relief
How do I know if I’ve been put on an Emergency Code?
There are different ways by which you can find out if you have been placed on an emergency code.
- Check your pay slip. You will find emergency tax code written on your pay slip, close to the national insurance number.
- If your tax rate is abnormally high, you could be on an emergency tax code
HMRC will adjust your payments over the year after gathering information about your income.
There are various types of emergency tax codes applied temporarily on employees. Some of them are given below –
1. 1150L W1/M1 Emergency Tax Code-
1150 W1/M1 emergency code is issued to employees when they declare they have been receiving taxable job seeker’s allowance, employment allowance, support allowance etc. on their employee statement.
W1 denotes weekly payments & M1 denotes monthly payments. This code enables you to calculate your employee’s tax weekly or monthly rather than the whole year. They are also entitled to personal allowance which is currently set at a limit of £11,850. Anything above this amount will be liable to tax.
In case of M1, you are entitled to 1/12th of your annual personal allowance and in case of W1; you are entitled to 1/52th of your annual personal allowance.
2. 1185 Emergency Tax Code-
1185 emergency code is the code which is used when the tax-free allowance of £11,850 is given to you but anything above this amount will be liable to tax.
In most of the cases, it is assumed that you are entitled to 1/12th of the annual allowance in case of 1185 M1, if you are paid monthly and 1/52th of the annual allowance in case of 1185 W1, if you are paid weekly.
3. Basic Rate Emergency Tax code-
Your basic rate emergency code is used when your earnings are taxed at a basic rate of 20% and you will not receive any tax-free personal allowance. Addition of codes such as “W1” or “M1” indicates that your tax is non-cumulative and you are paid on a weekly or monthly basis.
This code is mostly used when you receive additional sources of income. For example, a second job or a pension.
Employees earning between £11,850 and £45,000 will pay tax at the basic rate of 20%.
4. OT Emergency Tax Code-
OT emergency code is used when your earnings exceed the basic rate band. You will not be entitled to any personal allowance and you will pay tax according to the basic rate, higher rate & additional tax rate.
- Employees earning between £11,850 & £45,000 will pay tax at the basic rate of 20% on their earnings.
- Employees earning between £45,001 & £150,000 will pay tax at the higher rate of 40% on their earnings.
- Employees earning more than £150,000 will pay tax at the additional rate of 45%.
Why does my tax code end in M1 or W1?
M1 denotes monthly payments & W1 denotes weekly payments. An emergency code ending with M1 OR W1 indicates that your tax is non-cumulative and your tax will be calculated on a weekly or monthly basis and not annually.
When you are paid weekly, “W1” will be applied at the end of the emergency code whereas “M1” will be applied at the end when you are paid monthly.
If HMRC does not have sufficient information about your annual income, you may be put on OT tax code by your employer.
How much is Emergency tax?
If your employer places you on an emergency tax code that excludes the personal allowance, you could lose the £11,850 tax relief on your income. You will have to pay more tax on your income.
Here is an example of how to work out the tax you will be paying on your income:
- If we take an example of the tax year 2017-18, basic rate tax payers who are earning up to £45,000 will pay extra £1300.
- Whereas higher tax payers who are earning up to £100,000 will pay an extra £4600.
If you are earning more than £100,000, you will incrementally lose your personal allowance by £1 for every £2 you earn over 100k. You will lose all your personal allowance at £123, 000.
How do I correct my Tax Code?
You don’t have to worry about being on an emergency code. It should be changed by HMRC but you have to do certain things to speed up the process –
- Giving your P45 statement to your employer
- If you do not have your P45 statement with you, your employer will ask you to fill a starter checklist.