M1 Tax Coding

SueC_2

Quick question for the payroll people...

If an employer has accidently had an employee on M1 tax coding for several months (the correct tax code, but on a M1 basis), will that employee have paid too much tax, not enough tax, or the right amount of tax?

Sorry, I should know this, but I'm having a bit of a confused moment!

Thanks all.

DVardysShadow

No clearcut answer. It depends on when the employee went on M1 and whether they were on cumulative tax before and if so whether they actually paid anything - and whehter there was a gap. If the tax was right before and there was no gap, then M1 will make no difference unless they have become or stopped being a higher rate tax payer. I think.

SueC_2

DVardysShadow wrote: »

No clearcut answer. It depends on when the employee went on M1 and whether they were on cumulative tax before and if so whether they actually paid anything - and whehter there was a gap. If the tax was right before and there was no gap, then M1 will make no difference unless they have become or stopped being a higher rate tax payer. I think.

Thanks. They went onto M1 in October, when their tax code was changed. Prior to that they were being charged 'normally'. Over the course of the year they don't qualify as a higher rate tax payer, but between October and now there have been bonus payments in two months, which, if looked at in isolation, will have made those individual months look like they are higher rate. If that makes sense?

chrisbur

SueC wrote: »

Thanks. They went onto M1 in October, when their tax code was changed. Prior to that they were being charged 'normally'. Over the course of the year they don't qualify as a higher rate tax payer, but between October and now there have been bonus payments in two months, which, if looked at in isolation, will have made those individual months look like they are higher rate. If that makes sense?

What was their tax code before the change in October and what was it after the change?

SueC_2

It was 747L before the code change, and then should have been 688L, but has been set at 688L M1 in error.

How does that affect things?

chrisbur

SueC wrote: »

It was 747L before the code change, and then should have been 688L, but has been set at 688L M1 in error.

How does that affect things?

If the code was changed from 747L cumulative to 688L cumulative the extra tax owing back to 5 April up to October when it was applied would all have been taken out of the first wage, for this reason when the tax office reduce a tax code they often put it onto month 1 to avoid this happening so may not have been an error. The notice of coding may have a footnote or note on the back about month 1 code if it applies, not sure these days as long time since I last saw one. Either way without knowing the full details it is impossible to tell the exact tax position. If 688L is the correct code for the year then the 747L will have undertaxed. The bonus payments may have overtaxed and may or may not have cancelled this out, without full figures and details of what the 688L code is being applied for no-one can tell.

SueC_2

I had it clarified by the tax office earlier this morning, and you're absolutely spot on - 688L was applied on a M1 basis to compensate for the fact that it should have been applied from the beginning of the year.

However, the bonus payments meant that tax paid had now gone too far in the opposite direction, with the employee now having overpaid tax. The tax code is now going to be changed again to rectify the overpayments.

In case you're interested, it seems that the M1 instruction doesn't get mentioned on the employee's tax coding notice, only on the one that goes to the employer. Which explains why the employee thought the use of M1 had happened in error.

Still, all's well that ends well!

Thanks for your help.