A basic understanding of tax codes and their application is very helpful when one is trying to estimate their current and future tax deductions. Through this blog post, we will explain in detail the reasons why certain taxpayers are assigned the 0TW1 tax code. Additionally, we will also discuss how tax codes are assigned and tax rates calculated for accurate deductions especially when people change jobs and their income levels vary.

Why Is My Tax Code 0TW1?

If your tax code is 0TW1, it means that this is an emergency tax code, which is non-cumulative in nature and will be used temporarily. In simple words, this means that the amount of tax being deducted from your wages is only in consideration of your current weekly income and no previous earnings are being taken into account.

If your tax code is 0T1, 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 0T1 tax code with M or W extensions is 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.

When you are assigned an 0TW1 tax code, 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.

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.

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.

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?

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 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 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 £12,750, 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.

Conclusion:

Through this detailed discussion, we have come to learn that the 0TW1 tax code is an emergency tax code that is mostly used in cases when someone starts a new job. It indicates that the income tax being deducted is only by taking into account, the weekly earnings of the individual. Being a non-cumlative tax code it indicates tax deduction without taking previous incomes into account. It is also a temporary tax code that will change in the due course of time and will be shared by the HMRC with your employer and through your payslip to you.

FAQs: Why Is My Tax Code OTW1?

Is 0T an emergency tax code?

0T is mostly an emergency tax code which indicates that the individual’s entire sum of income will be taken into account for tax deduction; without consideration for personal allowance.  However, it may continue remaining your tax code for a while if you have used up all your personal allowance or not provided the required details to your employer for a tax deduction. 

What is the W1 M1 tax code?

The W1M1 tax code is a non-cumulative tax code that indicates that the rate that is being applied to your income is only taking the previous month into account and not the entire tax term.

Why has my tax code changed to W1?

There are many reasons why an 0T1 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. 

Why does my tax code end in T?

If your tax code ends in T, it indicates that there are certain items that require the review of the Inspector of Taxes. 

What does M1 mean on the payslip?

The M1 tax code on your payslip means that only the employee’s current month’s income has been considered for income tax calculation; while previous incomes and tax deductions are not being taken into account. This is usually due to individuals starting a new job.

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

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

Tax codes

Cumulative and Non-Cumulative Tax Basis – PayFit

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