How Is A Cumulative Tax Code Applied Versus A Non-Cumulative Tax Code?
By
HuutiMoney
When it comes to tax codes, it is important to understand the difference between cumulative and non-cumulative tax codes by comparing their application for tax calculation. This blog post provides detailed guidance on how you can compare a cumulative tax code with a non-cumulative one. Additionally, there are examples of how cumulative and non-cumulative tax codes apply to incomes to calculate the tax due on them; as well as a brief review of the implications of either of these tax codes on your income.
How Is A Cumulative Tax Code Applied Versus A Non-Cumulative Tax Code?
The application of a cumulative tax code versus a non-cumulative tax code is made on the basis of the following factors:
- whether the tax code applies to the entire tax year or a certain time period within the tax year
- whether the tax code applies to the sum of different sources of income or is applied to individual incomes and pensions
- whether or not the tax code has an M1 or W1 extension at the end
Cumulative tax codes, take into account your entire income for the tax year when calculating your tax liability. This means that all of your income, regardless of when it was earned, is considered when determining the amount of tax you owe.
For instance, if you have a job that pays monthly and receive a bonus in December, a cumulative tax code will spread out the tax liability for the bonus throughout the year, ensuring that you don’t pay an excessive amount of tax in a single month.
On the other hand, non-cumulative tax codes (also referred to as emergency tax codes) apply to a certain period of time within a tax year (when they appear on your payslip); without taking into account your income(s) for the remaining period of an entire tax term.
This is the reason why non-cumulative tax codes end with an M1 or W1 extension; indicating that the tax code only applies to the month or week in question.
Secondly, non-cumulative tax codes, consider each employment or pension separately when calculating tax. This means that the tax liability for each source of income is calculated independently, without taking other incomes into account.
Non-cumulative tax codes are commonly used when an individual has multiple employments or pensions and wants to ensure that each is taxed correctly without any overlap.
It is important to note that taxpayers who work at two jobs can have a cumulative tax code assigned to their first job and a non-cumulative tax code assigned to their second job.
How Is Tax Calculated Under A Cumulative Tax Code?
Under a cumulative tax code, tax is calculated on your overall year-to-date earnings. This means that the tax due on each payment is determined after taking into account any tax you’ve already paid this year and how much of your accumulated tax-free personal allowance has been used.
The formula for calculating tax under a cumulative tax code is:
(Total earnings to date – Personal allowance) x Tax rate = Tax due
Therefore, if your tax code is 1257L and your annual income is £25,000, your tax calculation under a cumulative tax code will be as under while taking into account the tax-free personal allowance for 2023/24 as £12,570 and applying a basic rate of 20% to your earnings:
(£25,000 – £12,570) x 20% = £2,486
The advantage of a cumulative tax code is that it ensures that you only pay tax on your actual earnings and that you don’t overpay tax during the year. However, the disadvantage is that it can be more difficult to track your tax liability if you have multiple jobs or if your earnings vary significantly from month to month.
How Is Tax Calculated Under A Non-Cumulative Tax Code?
Under a non-cumulative tax code, tax is calculated on your earnings in the current pay period only. This means that the tax due on each payment is not affected by any tax you’ve already paid this year or how much of your accumulated tax-free personal allowance has been used. In most cases, your personal allowance is ignored for the purpose of tax calculation.
The formula for calculating tax under a non-cumulative tax code is:
Earnings in current pay period x Tax rate = Tax due
Therefore if your monthly income in, let’s say, June 2023 has been £2,500 and you are assigned a non-cumulative tax code such as 0TM1, the tax due on your June 2023 income will be applied at the rate of 20% to your monthly income without deducting the tax-free personal allowance of £12,570 and will be calculated as under:
£2,500 x 20% =£500
The advantage of a non-cumulative tax code is that it is simpler to calculate, and it is less likely to result in an overpayment of tax. However, the disadvantage is that you may end up paying more tax in the long run if your earnings vary significantly from month to month.
If you’re not sure whether you’re on a non-cumulative tax code, you can check your tax code on your payslip or by contacting HMRC.
What Is The Impact On Taxpayers Of Cumulative Vs Non-Cumulative Taxation?
The impact of cumulative vs. non-cumulative taxation on taxpayers depends on the following factors:
- earnings
- personal allowance
- how often earnings vary
To ensure that taxpayers pay the correct amount of tax, cumulative tax codes are used. These codes calculate the tax due based on earnings to date, which means taxpayers only pay tax on their actual earnings and do not overpay tax during the year. However, if a taxpayer has multiple jobs or their earnings vary significantly from month to month, it can be challenging to keep track of their tax liability.
Non-cumulative tax codes are a simpler alternative, as they are easier to calculate and less likely to result in an overpayment of tax. However, if a taxpayer’s earnings vary significantly from month to month, they may end up paying more tax in the long run if they choose this option.
Taxpayers who are concerned about overpaying tax may prefer to opt for a cumulative tax code. This way, they can rest assured that they will only pay tax on their actual earnings, and any overpaid tax will be refunded at the end of the year.
On the other hand, taxpayers who find it difficult to track their tax liability may prefer a non-cumulative tax code. This option is simpler to calculate and less likely to result in overpaying taxes.
If you wish to gain advice from HMRC regarding your tax code you can contact them either online or by calling the HMRC helpline at 0300 200 3300 from Monday to Friday, between 8 am and 6 pm.
Conclusion:
Understanding the difference between cumulative and non-cumulative tax codes is essential for ensuring that your tax liability is calculated correctly and that you’re not paying more or less tax than you should. For taxpayers with multiple jobs or fluctuating earnings, it is essential to carefully consider which type of tax code is best for their situation. If they are worried about overpaying, a cumulative tax code may be the way to go. However, if they struggle to track their tax liability, a non-cumulative tax code could be a better fit.
References:
FAQs – What are the differences between cumulative and non-cumulative tax codes?
Cumulative v. Non-Cumulative Tax Codes: What’s the Difference?