Tax codes are a combination of letters and numbers that indicate the amount of deduction a taxpayer can expect from their annual income. The aim of this article is to explore the meaning and application of a cumulative tax code. However, for a deeper understanding of the nature of tax codes, we will also discuss non-cumulative tax codes, compare them with cumulative tax codes and also explore emergency tax codes.

What Is A Cumulative Tax Code?

A cumulative tax code is one that has been calculated on the basis of your year-to-date tax payments. This means that the cumulative tax code takes into account your tax payments made during a tax year while keeping an account of the amount of tax-free allowance that you have used during the same time. This means that any unused personal allowance can be passed on to future weeks.

The most commonly used cumulative tax code is 1257L. It indicates your tax-free personal allowance of 12,570 and that income earned above this amount will be subject to a tax deduction. 

In the case of a cumulative tax code, if there is overpaid tax by a taxpayer, the excess amount will be returned to them via a tax rebate; while underpaid taxes will be recovered automatically by the HMRC.

The easiest way to detect a cumulative tax code is by looking at the letters at which the tax code ends. No cumulative tax codes usually end with an X, W or M while cumulative tax codes will not have any of these letters.

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.

What Is An Emergency Tax Code?

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.

Emergency tax codes can be assigned to individuals by HMRC due to any of the following reasons:

  • the individual is changing jobs and has been assigned a new tax code in the middle of the tax term 
  • the individual was previously self-employed and is returning to a salaried job 
  • the individual is returning to the workplace after a career sabbatical

What Is The Difference Between A Cumulative Tax Code And A Non-Cumulative Tax Code?

Most taxpayers in the UK are assigned a cumulative tax code. This is a regular tax code without any extension at the end. When tax deductions are calculated in the case of cumulative tax codes, the annual income of individuals is accounted for. Additionally, any income tax that they may have paid is deducted from the next amount that is due upon taxpayers; along with a deduction of their Personal Allowance. 

For instance, 1257L which is currently the most common 2021-22 tax code in the UK is a cumulative tax code. It 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.

Meanwhile, the 1250LX tax code is a noncumulative 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.

How Are Tax Codes Assigned?

Tax codes are a combination of letters and numbers that determine the amount of income tax due on an individual. 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.

You can check your income tax and assigned tax codes by using your Government Gateway user details.

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.

Conclusion:

A cumulative tax code is one that takes into account a taxpayer’s annual tax payments as well as their personal allowance deductions throughout a tax term. How it is different from a non-cumulative tax code is primarily the fact that a non-cumulative tax code only takes into account the month or week in which it is applicable; without accounting for any paid (or unpaid) tax durign the remainder of the tax term.

FAQs: What Is A Cumulative Tax Code?

What do cumulative and non-cumulative mean?

When tax deductions are calculated in the case of cumulative tax codes, the annual income of individuals is accounted for. Additionally, any income tax that they may have paid is deducted from the next amount that is due upon taxpayers; along with a deduction of their Personal Allowance. A non-cumulative tax code is one that only takes into account the period in question for your tax calculation and deduction. 

What does the 1257LX tax code mean?

The 1250LX tax code is a noncumulative emergency tax code. It indicates that your taxable income will be taken into account from the time of being applied and not for the entire year. In this case, your Personal Allowance of £12,750 will be deducted from your cumulative earnings before a tax rate is applied. This is a temporary tax code and can be changed with a change in an individual’s circumstances.

What does 1250L cumulative mean?

The 1250L tax code indicates that this is a cumulative tax code taking into account your year-to-date tax payments. This means that if you start working in the middle of a tax term, you would have tax free personal allowance built up for the year. Due to this reason, you will pay a lesser amount of income tax for some time.

What is a normal tax code?

A normal tax code is a combination of letters and numbers that indicate your personal allowance and the nature of your tax deduction. 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.

What tax code should I be on in 2022?

1257L is the most common tax code for 2022 and is expected to remain unchanged until 2026. It has replaced the previous tax code of 1250L.

References:

What are the differences between cumulative and non-cumulative tax codes? – Key Portfolio

Tax codes

Cumulative and Non-Cumulative Tax Basis – PayFit

FAQs – What are the differences between cumulative and non-cumulative tax codes

Understanding your tax code 2021/22 – Liquid Friday

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