The term ’emergency tax’ may sound a bit scary, but in simple terms, it just means the tax code that HMRC will use against your employment or pension income until they have the information they need to calculate the correct code.
In reality, the tax code issued by HMRC against your income is little more than a best guess by them to deduct income tax at source, as close to the actual liability for the year.
What does emergency tax mean?
There are two ways HMRC can operate a tax code against income. Either on:
- A cumulative basis – your tax is calculated on your overall year-to-date earnings. The tax due on each payment is determined after taking into account any tax you’ve already paid this year and how much of your accumulated tax-free personal allowance has been used; or
- An emergency basis – also known as a week one/month one basis. You’ll pay tax on all your income above the basic personal allowance. For the 2022/23 tax year, this is £12,570.
It is easy to tell if your income is being taxed on a cumulative basis or an emergency basis; if it is emergency, your code will either have an X, M1 or W1 suffix.
When does emergency tax apply?
The most common scenario for emergency tax is when you begin:
- New employment;
- Accessing a pension; or
- Start to receive employment benefits.
Of course, if you begin to receive employment benefits, HMRC may opt not to apply an emergency code – instead, they might calculate the tax they predict you’ll be due and include this as a deduction in your tax code!
Before Real Time Information came into effect (where employers had to send pay details to HMRC on or before the time they paid their employees on a real basis), HMRC needed a P45 from your previous employer before your new tax code could be calculated.
What can I do about this?
If you have started new employment, the chances are, HMRC will receive the correct details and issue the correct tax code fairly quickly. Any tax overpaid will be refunded through your monthly/weekly salary. And of course, you may be able to speed things up by contacting HMRC and advising them of the position.
On the other hand, if you have received a ‘one-off’ payment in the year, for example a withdrawal from a Self-Invested Personal Pension (SIPP), you will need to wait until the end of the tax year to make any claim for any overpaid tax.
If you already have a tax adviser, please note that they will not automatically receive a copy of the notice of coding. If you would like codes checked by your adviser, you will need to forward onto them a copy. If you have a query about this blog, feel free to contact our team at: mail@ct.me.
Author: Alan Dean, CT: Personal Tax
