M1 tax code and bonus

onlyroz

Hi all.

I have been working for the same company for two years, and I normally get paid a regular monthly amount with a bonus paid in february. However, looking at my pay slips it seems like I was put on an M1 tax code in September last year - I'm not currently sure why this was done.

According to the various PAYE calculators I have looked at, I seem to be paying the correct amount of tax - except for this month when I received my bonus, where I appear to have been taxed at the 40% rate.

My question is, will the tax overpayment even itself out over the next few months, or will I have to apply for a refund at the end of the tax year? And I don't really understand the full implications of the M1 tax code, and why I might have been put on it.

molerat

On an M1 code it will not correct itself so you will either have to reclaim it next FY or ring the tax office to find out why you are on M1 and possibly get it corrected by the end of March.

The M1 basically means each month is taken in isolation using 1/12th of your annual allowance and not smoothing out the ups and downs over the year. 99% down to a HMRC !!!! up.

jem16

onlyroz wrote: »

However, looking at my pay slips it seems like I was put on an M1 tax code in September last year - I'm not currently sure why this was done.

What was your tax code before September and what was it afterwards?

Did you get a P2 Coding Notice at the time of the change and if so what did it say?

onlyroz

I did get notice of a tax code change in August last year - I was moved from 787L to 636L, but the notice doesn't say anything about it being an M1 code. I only noticed this month because of the bonus. I have done my sums on this month's pay and I can see that I have been taxed this month as if I am a 40% tax payer with a salary of around £60k. However, I am normally a 20% tax payer with a salary of around £40k.

jem16

onlyroz wrote: »

I did get notice of a tax code change in August last year - I was moved from 787L to 636L, but the notice doesn't say anything about it being an M1 code.

It would have said on the reverse of the P2 coding notice. It's usually worded -" we have asked your employer to use your tax code in a special way."

The reason behind this is due to the fact that your tax code was being lowered and if used on a cumulative basis would have seen a large amount of extra tax being taken in one go.

What was the reason behind the lowering of your tax code? Do you have any taxable benefits via work?

I only noticed this month because of the bonus. I have done my sums on this month's pay and I can see that I have been taxed this month as if I am a 40% tax payer with a salary of around £60k. However, I am normally a 20% tax payer with a salary of around £40k.

Which is what you would expect from a Mth1 tax code. I suggest that you get onto HMRC right away and ask them to issue a cumulative tax code as you have overpaid tax this month because of the bonus.

Zogger

I've just had a very similar issue where I received a notice of coding last month as my health insurance premium has been updated. This month I was paid the bonus with an M1 tax code and they calculated my salary as something ridiculous like £80,000 based on that.
The funny thing is the payroll department also forgot to update my bonus amount as it was meant to go up this year, so I was both underpaid and overtaxed, although I would have been taxed even more if I had been correctly paid!
It took me ages to work out what was going on because I also stopped paying my student loan via PAYE this month so the amount still looked "about" right until I noticed the student loan wasn't there, I'd been payed more and earned less.

Anyway, I called HMRC (0135 535 9022, not the 0845 number!) and told them my earnings and they have reissue the correct tax code and should expect a refund next month.

onlyroz

Yes, I called HMRC today and they've issued me a cumulative tax code for the March payroll. They've also updated my tax code for 2013-2014 because they now, apparently, have actually figured out what my health insurance is worth. Only took them two years to get it right...

And yes, I made sure that I didn't use the 0845 number and I got straight through. Was expecting to be sitting on the phone for ages...

jem16

Zogger wrote: »

This month I was paid the bonus with an M1 tax code and they calculated my salary as something ridiculous like £80,000 based on that.

They didn't really. They simply looked at that month in isolation and gave you one twelfth of your tax-free allowance and one twelfth of the basic rate band. Anything after that was charged at 40% or 50% as appropriate.

onlyroz wrote: »

Yes, I called HMRC today and they've issued me a cumulative tax code for the March payroll. They've also updated my tax code for 2013-2014 because they now, apparently, have actually figured out what my health insurance is worth. Only took them two years to get it right...

HMRC can only go on figures that the employer or yourself gives them. As you, presumably, know what your health insurance is worth, did you phone them with the correct figures?

The point here is that HMRC issued Mth1 codes to both of you to avoid a large amount of tax being taken from you in one month. They are not aware of any potential bonus payments.

Taxable benefits and bonus payments are always going to be difficult to get right with tax. However you can help by keeping an eye on things and updating HMRC with accurate figures on taxable benefits. You can also ask them not to issue a Mth1 tax code when you know there are likely to be bonus payments that will be better taxed with a cumulative tax code.

onlyroz

Well from now on I think I'll take a more pro-active approach to my tax code. Until now I've let them figure it out for themselves but things got a bit messed up when I changed jobs two years ago and the employee benefits were slightly different. HMRC seemed to get confused with a part year with the medical insurance from my old job and a part year with the medical insurance for the new job. It seemed to totally bamboozle them and they seem to have been playing catch-up with my tax code ever since. I think that they've now got it figured out. Hopefully things won't get confused if I go into the higher bracket next year, because I've been on the threshold for a few years now...

jem16

onlyroz wrote: »

Well from now on I think I'll take a more pro-active approach to my tax code.

I think that's the best way to do it. Every year HMRC send me a P2 Coding Notice with a tax code based on estimated income. Every year I then have to phone up and get it changed with realistic figures. HMRC can only estimate but you should be more accurate.

Hopefully things won't get confused if I go into the higher bracket next year, because I've been on the threshold for a few years now...

Remember with your lower tax code, you will cross into higher rate tax sooner.