W1M1 Tax Code | What You Need to Know About Emergency Tax Rates?
Understanding your tax code is essential for managing your finances and ensuring you’re paying the correct amount of tax. The W1M1 tax code, often referred to as an “emergency tax code,” can affect how much you take home each month.
If you’ve recently started a new job or changed employment circumstances, you may find yourself assigned this temporary tax code.
In this article, we’ll explore what the W1M1 tax code means, why it might apply to you, and how to resolve any issues it creates.
What is the W1M1 Tax Code?
The W1M1 tax code, often referred to as an emergency tax code, is a temporary tax code applied when HMRC doesn’t have enough information to calculate your tax on a cumulative basis.
It ensures that taxes are deducted from your earnings, but the calculation is done in isolation for each week or month, without considering your total income or tax payments for the year so far.
This tax code plays a crucial role in the UK’s PAYE (Pay As You Earn) system, acting as a safeguard to avoid underpayment of taxes.
While it ensures compliance, it can lead to discrepancies such as overpayment or underpayment of taxes until resolved.
Understanding the Components of the W1M1 Tax Code
The W1M1 tax code includes two key elements that define how it operates:
W1 (Week 1)
- This component calculates your tax on a weekly basis.
- It only considers the income earned in a single week without factoring in previous weeks or future income in the same tax year.
M1 (Month 1)
- This component calculates your tax on a monthly basis.
- Similar to W1, it only takes into account the income earned in that specific month, disregarding earnings or tax deductions from earlier months.
Together, W1M1 represents a non-cumulative tax code, meaning it treats each pay period as a standalone entity, unlike cumulative tax codes that balance your tax-free allowance across the entire tax year.
How Does the W1M1 Tax Code Differ from Standard Tax Codes?
Standard cumulative tax codes consider your income and tax payments for the entire tax year. They adjust dynamically, ensuring you receive the correct amount of tax-free personal allowance and pay the appropriate tax based on your total earnings.
The W1M1 tax code, on the other hand, does not make such adjustments. It applies tax-free allowances on a fixed basis for each period (weekly or monthly), which can result in temporary imbalances in tax deductions.
Example:
If your annual personal allowance is £12,570, under the W1M1 code:
- Weekly earnings will allow a tax-free portion of £242 per week (12,570 ÷ 52 weeks).
- Monthly earnings will allow a tax-free portion of £1,048 per month (12,570 ÷ 12 months).
In contrast, a cumulative tax code would adjust these allowances based on your earnings so far, ensuring that underpayments or overpayments are corrected throughout the year.
How Does the Emergency Tax Code Work?
The emergency tax code, often represented as W1M1, operates on a non-cumulative basis, which means it calculates your tax on a “per payment period” approach rather than considering your income and tax deductions over the entire tax year. This is significantly different from how standard cumulative tax codes function.
Here’s a detailed breakdown of how the W1M1 tax code works:
1. Weekly (W1) and Monthly (M1) Calculations
The emergency tax code splits your tax-free personal allowance into equal portions for either weekly or monthly earnings:
- W1 (Week 1): Your income is taxed based only on what you earn in that particular week. The system ignores all earnings or tax payments from earlier weeks.
- M1 (Month 1): Your income is taxed based only on your earnings for the specific month. Similarly, it disregards any income or tax payments from previous months in the tax year.
For example:
- If your annual tax-free allowance is £12,570, the W1 tax code will divide this into £242 per week, and the M1 code will divide it into £1,048 per month.
- When your employer processes your payroll, they will apply this pro-rata tax-free allowance for the period, ensuring the tax deduction only accounts for your current earnings.
2. Why It’s Non-Cumulative?
Under a cumulative tax code, tax calculations account for all your earnings since the beginning of the tax year (6 April in the UK). It adjusts your tax deductions dynamically, ensuring you receive the correct tax-free allowance for the entire year, even if your income varies month to month.
The W1M1 tax code doesn’t do this. Instead, it treats each payment period (week or month) as a standalone entity, ignoring any prior earnings or deductions.
3. The Impact of Non-Cumulative Taxation
Because the emergency tax code disregards earlier income, it can lead to the following:
- Overpayment of Tax: If you’re entitled to a larger cumulative tax-free allowance based on your annual income, the W1M1 code won’t account for this, resulting in higher-than-necessary tax deductions.
- Underpayment of Tax: In rare cases, if you have fluctuating income levels, the W1M1 code might under-deduct taxes. This could lead to unexpected tax liabilities later.
4. Examples of How the Emergency Tax Code Applies
Scenario 1: Starting a Job Mid-Tax Year
Imagine you start a new job in October without a P45 from your previous employer.
- HMRC doesn’t have records of your prior earnings and tax payments, so your employer assigns the W1M1 tax code.
- Your tax-free allowance is divided into the remaining months or weeks, rather than applying your full annual allowance cumulatively.
Scenario 2: Switching Employers Without a P45
If you change jobs and don’t provide your P45 (which details your earnings and tax deductions from your previous job), the new employer might temporarily assign the W1M1 tax code until HMRC updates your information.
Scenario 3: Taking on a Second Job
When you have more than one job, the second employer typically assigns an emergency tax code like W1M1 to ensure taxes are deducted on that income separately from your primary employment.
5. How the Emergency Tax Code Affects Different Income Levels?
The emergency tax code can create noticeable differences depending on how much you earn:
- Lower Income Brackets: Individuals in lower income brackets might notice a significant portion of their tax-free allowance unused, leading to higher tax deductions in the short term.
- Higher Income Brackets: For higher earners, the emergency tax code might initially under-deduct taxes, leading to corrections and potential liabilities once the tax code is updated.
6. Why Is the W1M1 Code Used?
The W1M1 tax code is not intended to penalise employees but to ensure taxes are deducted correctly in the absence of sufficient information. HMRC uses this code as a safeguard to prevent underpayment of taxes until your records are updated.
While the system errs on the side of caution by deducting more tax than necessary in most cases, it helps avoid large tax liabilities for employees at the end of the tax year.
7. Adjustments When the Tax Code Is Corrected
Once HMRC updates your records and assigns the correct cumulative tax code, your payroll will automatically adjust:
- Any overpaid tax will typically be refunded through your future payslips.
- If there’s an underpayment, HMRC may adjust your tax code to recover the owed amount over the remaining tax year.
Why Might You Be Assigned a W1M1 Tax Code?
The W1M1 tax code is often assigned as a temporary measure under specific circumstances. Common reasons include:
- Starting a New Job: When you start a new job and do not provide your new employer with a P45 form from your previous job, the employer may use the W1M1 tax code until they receive instructions from HMRC.
- Multiple Jobs: If you’re working more than one job, your second employer may use the W1M1 tax code to calculate tax separately from your main job.
- Changes in Taxable Benefits or Income Sources: If your taxable benefits or other income sources change, your tax code may be temporarily adjusted to W1M1 until HMRC updates your records.
- Incorrect or Missing Information in HMRC Records: Errors in your tax record, such as incorrect personal details or missing employment information, can also result in the W1M1 tax code being applied.
- Delayed Processing by HMRC: Sometimes, employers use the W1M1 tax code as a placeholder while waiting for HMRC to confirm the correct tax code for an employee.
How to Resolve a W1M1 Tax Code Issue?
The good news is that the W1M1 tax code is temporary and can be corrected with the following steps:
- Check Your Payslip: Look for tax codes with the suffix W1 or M1. This indicates a non-cumulative emergency tax code.
- Contact HMRC: Call HMRC or use their online services to update your tax information. You’ll need to provide details about your employment, including your employer’s PAYE reference number.
- Provide Missing Documents: Submit any missing documents, such as your P45 (from a previous employer), P60 (year-end tax summary), or details of any taxable benefits or additional income sources.
- Notify Your Employer: Inform your employer about the tax code issue so they can liaise with HMRC and apply the correct code once it’s updated.
- Monitor Your Payslip: Once HMRC updates your tax code, check your payslips to ensure the new code is applied and your deductions are correct.
What Are the Impact of W1M1 Tax Code on Your Take-Home Pay?
The W1M1 tax code can significantly affect your take-home pay in the short term:
- Higher Deductions: If the W1M1 code doesn’t account for your full tax-free personal allowance, you may pay more tax than necessary.
- Risk of Overpayment: Overpayments are common under this tax code but are refunded once your tax code is corrected.
To minimise the impact, it’s crucial to address the issue as soon as you notice the W1M1 code on your payslip.
Comparison: Standard vs Emergency Tax Codes
Aspect | Standard Tax Code | W1M1 Emergency Tax Code |
Basis of Calculation | Cumulative (Year-to-Date) | Non-Cumulative (Weekly/Monthly) |
Accounts for Past Income | Yes | No |
Risk of Overpayment | Low | High |
Duration | Permanent (unless updated) | Temporary |
Conclusion
While the W1M1 tax code may seem daunting, it’s a temporary measure designed to ensure tax compliance.
By understanding its purpose, taking proactive steps to correct it, and staying informed about your tax obligations, you can minimise its impact and ensure accurate tax payments.
FAQs About the W1M1 Tax Code
Can I get a refund for overpaid tax?
Yes, any overpaid tax will be refunded once your tax code is corrected. Refunds may be processed through adjustments to your payslip or issued as a direct payment by HMRC.
How long does it take to update my tax code?
It typically takes 2–4 weeks for HMRC to process tax code updates, provided all necessary information is submitted promptly.
Is the W1M1 tax code permanent?
No, it’s a temporary measure. Your tax code will revert to a cumulative basis once HMRC updates your records.
What should I do if my employer doesn’t update my tax code?
Contact HMRC directly to ensure they’ve provided the updated tax code to your employer.
Can I avoid being assigned a W1M1 tax code?
Providing accurate and complete information, including your P45 or employment details, can help avoid this tax code in most cases.