It is common for individuals to start a job for the first time or switch a job in the middle of the tax year. Through this blog post, we aim to learn about the tax code that may be assigned to you, if you are in a similar situation. For a detailed understanding of the elements of a tax code calculation, we will also discuss how tax codes are calculated and applied to incomes, how your personal allowance is accounted for in such calculations and the difference created by the application of a non-cumulative tax code on your income(s).
What Is Your Tax Code If You Are Starting Work Halfway Through Tax Year In The UK?
If you start work halfway through the tax year in the UK, you will be assigned a non-cumulative emergency tax code that applies only till the end of the ongoing tax year and will be changed for the next tax year to make it cumulative (applicable to your entire income for the year).
When you are starting work in the middle of the tax year you may be assigned the 1250LX tax code which means that the tax rate applied to your income is only applicable for the period in consideration. This tax code is also applicable in cases where self-employed individuals return to salaried jobs and experience a change to their tax code. It may also be due to the fact that someone is returning to the workplace after a career sabbatical.
The 1250LX tax code is an emergency tax code. This means that it is temporary and can be changed with a change in an individual’s circumstances. Other emergency tax codes include those ending with an M or a W.
When you start work halfway through the tax term, you may also be assigned the OTM1 tax code which also indicates that your tax deduction is non-cumulative; it should only be considered for the month in question and not the entire year. Additionally, you may have no personal allowance to be considered and your entire income will be considered for tax calculation for the month in question.
If you are paid on weekly basis, your tax code will be OTW1. If your tax code is OT1, it means that you have no tax free personal allowance and a basic rate of income tax will be applied to the total amount of your income.
There are other reasons as well for which an OT1 tax code with M or W extensions is assigned to individuals. For instance, if you’ve recently started a new job and have not been able to give your employer your old P45 or you haven’t submitted your P46 as yet, you will be assigned an OT1 tax code.
If you are starting to work for the first time, you will not have a P45 as other employees do and will be asked to fill out a Starter Checklist (previously known as the P46) by your employer. The following information will be asked in this checklist:
- your NINO
- if you have been claiming a jobseeker’s allowance or employment and support allowance before starting a job
- if you have got a second job
- if you are paying off a student loan
Based on the information you provide, an emergency tax code will be assigned by HMRC until a permanent one is assigned for regular tax deductions.
If you don’t know your tax code, you can find it through any of the below-listed documents:
- P45 form
- PAYE coding notice
- Pension advice slip
- HMRC website
What Are Tax Codes?
Tax codes are a combination of letters and numbers that determine the amount of income tax due on an individual. While the letters indicate your financial position and how it relates to your personal allowance, the numbers tell your employer or pension provider the amount of tax-free income that you are eligible for in that tax year.
For instance, 1257L (currently the most common 2021-22 tax code in the UK) refers to the new Personal Allowance rate for 2021-22, which is £12,570 and the letter “L” indicates that the individual is entitled to this amount of tax-free income. Any taxes that are to be charged will be above additional amounts beyond this figure.
You can check your income tax calculations online through the HM Revenue and Customs website. If you are employed in more than one job, you will have to conduct multiple calculations to have an estimate for income tax deductions for each source of earnings.
How Are Tax Codes Calculated?
The following steps are followed by the authorities while assigning tax codes:
- Step 1: Your tax allowances are calculated. In most cases, this is an individual’s personal allowance added to any other allowances and job expenses.
- Step 2: Your deductions are calculated. These are incomes for which tax has not been paid and may include any part-time work or certain state benefits.
- Step 3: The deductions are subtracted from the tax allowances. The result is your pre-tax income. If this amount equals personal allowance, your income remains tax-free.
What Is A Non Cumulative Tax Code?
A non-cumulative tax code is one that only takes into account the period in question for your tax calculation and deduction. This means that depending on whether you receive your pay on a weekly or monthly basis, a non-cumulative tax code will apply for that specific period only and it may change the next time you receive a payslip. In the case of weekly pay, you will find a W1 extension at the end of your tax code; while for a monthly salary your tax code will end with an M1 extension.
This means that the income tax rate is applied to the entire sum of income(s) of an individual without the deduction of Personal Allowance from their earnings. In case an individual has paid a sum of income tax before a non-cumulative tax code is applied to their income, the amount cannot be adjusted. Therefore, there are chances that taxpayers will end up overpaying their taxes when a non-cumulative tax code is assigned to them in the middle of a tax term.
However, this overpaid amount is recoverable by contacting the HMRC and updating your employment information with them.
Most of the time, non-cumulative tax codes are also emergency codes; this means that they are temporary and unlike regular tax codes, they can change during the year due to a change in circumstance or income(s) of the individual that they are being applied to.
What Is Personal Allowance?
When you are working in the UK, there is a certain amount of your income that remains tax-free as it is considered to be a Personal Allowance. The amount set for Personal Allowance during the 2021-2022 tax period is £12,570.
Your personal allowance is applicable to your combined incomes from different sources. However, for the purpose of tax deduction, your main or primary job, which is also the source of a higher income is considered for Personal Allowance deduction prior to a tax rate being applied.
Since you get Personal Allowance once (it does not apply to each individual source of income), it may be in your own interest to have it applied to your main job and not the second one. However, if someone works two jobs and their cumulative income is less than the Personal Allowance amount of £12,570, they can have it spilt across both incomes. Sometimes a second job may increase your tax bracket which leads to a higher tax deduction on your income with an insignificant impact on your take-home salary.
Your second job is usually considered to be the one that provides a lower income than the first one and there is no consideration for Personal Allowance since it has already been accounted for. The reason is that the HMRC divides your total income by sources to calculate the amount of tax that is due on your cumulative income.
How Much Income Tax Do I Have To Pay?
Incomes above the minimum cap are taxed at an incremental rate of 20 per cent to 45 per cent depending on whether an individual belongs to the basic, higher or additional tax rate band. Below are details of these bands:
- 0 per cent income tax when income is up to £12,570
- 20 per cent income tax when income is between £12,571 and £50,270
- 40 per cent income tax when income is between £50,271 and £150,000
- 45 per cent income tax when income is above £150,001
If you are self-employed, you are required to file a self-employed tax return to pay your taxes through a self-assessment.
The discussion in this article makes it clear that if an individual starts working in the middle of the tax term, they will be assigned a non-cumulative emergency tax code such as 1250LX or an OT1 tax code. Both of these tax codes do not take into consideration the Personal Allowance amount of £12,570 which means that the entire amount of one’s income is taxed on the basis of the assigned band.
FAQs: What Is Your Tax Code If You Start Work Halfway Through Tax Year In The UK?
Do you pay tax as soon as you start work?
Yes, you will have to start paying taxes as soon as you start work. If you start working in the middle of a tax year, you will be assigned a non-cumulative emergency tax code that does not deduct your personal allowance from your income before a tax rate is applied.
How do I avoid emergency tax when starting a new job in the UK?
In order to avoid emergency tax when starting a new job in the UK, you should provide your new employer with your previous P45 at the earliest possible. This form will tell your new employer the amount of tax that you have paid during the ongoing ta year.
How much money can you earn in the UK before you start being taxed?
Once your personal allowance for the year is deducted from your annual income, the remaining amount will be subject to tax. This means that if your income is between £12,571 and £50,270, the lowest rate of income tax will be applied at 20%.
Can I start a new job without P45?
Yes, you can start a new job without a P45 (although it is best to have your previous P45 transferred to your new employer if you have one). If you don’t have a P45, you will need a P46 or a starter checklist at your new job.
Do I get the emergency tax back?
Yes, if you have overpaid taxes while being assigned the emergency tax code, your employer will refund the excess amount at the end of the tax term.