Tax codes are the basis for the income tax deductions of taxpayers. While some tax codes are temporary due to the nature of an individual’s circumstances, most of them remain permanent. Through this blog post, we will discuss in detail the nature of non-cumulative tax codes and how their application is different from non-cumulative ones. We will also explore how tax codes are assigned and taxable amounts applied to one’s income (or multiple incomes in the case of primary and secondary jobs).

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.

Non-cumulative 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 One?

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. 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. 

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 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. 

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 £12,750. 

Your personal allowance is applicable on 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 is 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 £12,750, 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.

Do I Have To Pay Tax On Income From A Second Job?

Yes, if you have a second job, your income from this source of earning will also be taxed. However, the tax that you pay on a second job will depend on a number of factors. 

Generally speaking, your second job is usually assigned a BR (Basic Rate) tax code which indicates that there is a 20 per cent tax due on your income.  

To avoid being overtaxed or undertaxed (with tax arrears due at the end of the term) due to a second job, it is advisable to follow the below instructions: 

  • When you start a second job you must make sure that you get a Starter For or P46 from your new employer. This form is used to update your employment details at the HMRC.
  • Confirm the tax codes assigned to both of your jobs. Your main job is usually assigned a 125L tax code for 2021-2022; while your second job will be assigned a BR, D0 or D1 tax code.

If your second job involves you in a self-employed position, you will have to pay your own tax and National Insurance contributions by filing a self-assessment tax return on the 31st of January every year. 

Conclusion:

A non-cumulative tax code is a temporary or emergency tax code that only applies for the period in question and not the entire tax term. It is usually denoted by a W or an M at the end which indicates whether the application is on a weekly or monthly basis. Noncumulative tax codes are usually assigned to individuals who have joined the workforce after taking a break from their career, switched from claiming benefits to a new job or left their self-employment status to become an employee. 

FAQs: What Is A Non Cumulative Tax Code?

Why do I have a non-cumulative tax code?

You may be assigned a non-cumulative tax code by HMRC if you are changing jobs and have been assigned a new tax code in the middle of the tax term, you were previously self-employed and are now returning to a salaried job or you are returning to the workplace after a career sabbatical. It indicates that your tax will be deducted on the basis of your current term of employment and any previous payments or exemptions will not be taken into account.

What is non-cumulative tax?

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.

What does 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. 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 

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.

How do I find out what tax code I am on?

You can find your tax code on your payslip, P45 form, P60, PAYE coding notice, pension advice slip or the HMRC website. You can also check your income tax calculations online through the HM Revenue and Customs website.

References:

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

Tax codes

Cumulative and Non-Cumulative Tax Basis – PayFit

What if I pay too much tax?

Tax code 1250L vs 1250 W1, M1 and X – what do the different letters in tax codes mean? | 

Income Tax – GOV.UK

Income tax calculator 2022-23, 2021-22 and 2020-21

How much tax do you pay on a second job? – The PAYE People

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