The purpose of a tax code is to classify the tax rate that is applicable on an individual’s income so that there is no under or over deduction of taxes from their earnings. Through this blog post, we will discuss in detail the application of the OTM1 tax code; as well as explain how emergency tax codes are applied on incomes, calculation of tax codes and what types of incomes are exempt from the deduction of taxes.

What Does Tax Code OTM1 Mean?

The OTM1 tax code indicates that your tax 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.

The OTM1 tax code is an emergency tax code that is assigned on a temporary basis to individuals either when they have started a new job or they haven’t updated their details with HMRC.

If you were paid on weekly basis and were faced with a similar situation, your tax code would 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 many reasons why an OT1 tax code with M or W extensions are assigned to individuals. One of the reasons may be that you have no tax free allowance remaining which may be exempted from income tax. Another reason could be that you’ve recently started a new job. Due to this, you have not been able to give your employer your old P45 and you haven’t submitted your P46 as yet. 

This means that taxpayers living in England will be charged as follows:

  • 20% tax on income up to £37,500
  • 40% tax on income between £37,501 and £150,000 
  • 45% tax on income above £150,000

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.

To confirm your tax code, you can check any of the below-listed documents:

  • Payslip
  • P45 form
  • P60
  • PAYE coding notice
  • Pension advice slip
  • HMRC website

In the case that a taxpayer has overpaid their tax due to any of the following reasons, 

  • being put on an emergency tax code due to starting a new job,
  • having two jobs simultaneously, or
  • switching from a full time to a part-time job

they can claim a tax refund and reclaim the amount from HMRC after the end of the tax year. Claims for overpaid taxes can be made up to four years. This means that an overpaid tax in 2022 can be claimed until 2026.

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 pr 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.

How Are Tax Codes Assigned?

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.

How Are Tax Identification Numbers Used In The UK?

Tax identification numbers are used to track and monitor the tax accounts of individuals. Although the term TIN Number is not specifically used in the UK in its strictest sense, the HMRC issues two TIN-like numbers to members of the public. The purpose and use of these are described below:

  • The Unique Tax Payer Reference (UTR): This is a ten-digit set of numbers issued by the HMRC to individuals and businesses who qualify for paying tax returns in the UK. You will find this number on the front page of the tax return (form SA100 or CT600). In addition to this, you will find it on a “Notice to complete Tax Return” (form SA316 or CT603) or a Statement of Account. It is also printed next to the headings of “Tax Reference”, “UTR” or “Official Use”; but the appearance and terms that are used will depend on the type of document issued. 
  • The National Insurance Number (NINO): This includes two letters which are followed by six numbers and then only one of the letters between A, B, C and D. Individuals residing in the UK will be issued a NINO once they are 16 years of age. They will be informed by the Department for Work and Pensions (DWP) or the HMRC. If you are an employee, you will find this number on your payslip as well as on a Statement of Account issued by HMRC. It links individuals to their records of national insurance contributions, tax payments, student loans as well as social security benefits.

How Much Tax Do I Have To Pay In The UK?

According to a general estimate, an individual pays one-third of their income in the form of taxes in the UK. While the amount of tax one pays depends on the scale of their income, some people will pay a higher tax perhaps due to the property that they own or inheritance that they may receive.

There are different types of taxes under the UK taxation system. Direct taxes include PAYE (Pay As You Earn) and National Insurance. These account for 20 per cent of an individual’s income. On the other hand, indirect taxes include VAT, council tax as well as duties on alcohol and petrol. 

Basic taxes in the UK include the following:

  • Income Taxes 
  • Property Taxes 
  • Capital Gains 
  • UK Inheritance Taxes 
  • Value Added Tax 

These are all progressive taxes; which means that the scale of tax increases with an increase in income.

How Much Income Tax Do I Have To Pay In The UK?

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 in order to pay your taxes through a self-assessment. 

Which Incomes Are Tax-Free In The UK?

Incomes derived from any of the following sources are considered to be tax-free in the UK:

  • Transport costs of an employee’s (and their immediate family) relocation for work in the UK
  • Winnings from games, pool betting, lotteries or competitions with prizes
  • Long service employee awards (certain limitations apply)
  • Individual savings account amounting to £20,000
  • Incomes such as interest or dividends arising from savings accounts 
  • Pensions paid to war widows and dependents
  • Social security and state benefits include maternity allowance, employment and support allowance, attendance allowance, child tax credit and housing benefit. 

Who Is Tax Exempt In The UK?

Individuals may apply for tax exemption if they face the following conditions:

  • If someone is a tax resident for at least one year out of the previous three years 
  • They have spent less than 16 days in the UK during the previous tax year
  • They are not a UK resident

The same applies in case:

  • Someone is not a tax resident for the previous three years
  • They have spent less than 46 days in the UK

Conclusion:

While each tax code has its own implication, there are certain tax codes such as the OTM1 tax code that are deemed to be emergency tax codes. With an M1 extension, there are further implications since this is a non-cumulative tax code with the current code being applied only for the month during which the tax code appears on a payslip. To make sure that one’s understanding of tax codes is clear, it may help to have a brief overview of the different tax codes and an understanding of how taxes are calculated.

FAQs: What Does Tax Code OTM1 Mean?

How do I fix my tax code OT?

An OT tax code indicates that you have no tax free personal allowance and the basic rate of 20 per cent will be applied for your tax deduction. If you have been assigned this code in error, you should inform the HMRC so that you are not overtaxed.

Is OT tax code emergency tax?

Yes, the OT tax code is an emergency tax code. It is mostly assigned on a temporary basis to individuals either when they have started a new job or they haven’t updated their details with HMRC.

Will I get emergency tax back?

Yes, you will get emergency tax if you have overpaid. In some cases, HMRC will automatically return the excess amount to you; while at other times you may have to formally apply to HMRC for a tax refund.

Can I update my tax code online?

Yes, you can update your tax code online through the HMRC website. If you think your tax code is wrong, you should inform the HMRC and they will make the necessary amendments before informing your employer of the change in your tax code.

Can an employer change your tax code?

Yes, an employer can change your tax code. However, they will only do this based on the instruction received from HMRC in consideration of the documents and details provided by you.

References:

Emergency tax codes – Which?

What Is an OT Tax Code? | Tax Rebate Services.

0T, 0T-W1 and 0T-M1 – Key Portfolio

What your tax code means – GOV.UK

Tax codes – GOV.UK

HM Revenue & Customs – GOV.UK

Income Tax – GOV.UK

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