What does the ‘X’ (or ’1′, or ‘W1′, or ‘M1′) after my tax code mean?

(UK relevant – Calculating tax cumulatively, on a cumulative basis. Calculating tax non-cumulatively, on a non-cumulative basis, or a week 1 basis, or a month 1 basis.)

You may have several different documents that quote your tax code. It may be shown on your copy of the P45 that your previous employer gave you. You may receive a form P2Notice of Coding from your tax office that informs you of a change of tax code. You tax code is printed on your wage slip and also on the form P60 End of Year Certificate that your employer gives you after the end of each tax year (5 April).

On any or all of these documents you may see an ‘X’, a ’1′, or the letters ‘W1′ or ‘M1′ printed after the tax code, e.g. 647L X, or 647LW1. They all mean the same thing. If there isn’t a reference like this after your tax code, don’t worry, that is how it should be. They are only used in circumstances where your tax code cannot be used in the normal manner.

Calculating tax “cumulatively”

The normal manner in which tax codes are used is called “cumulative”. This is what “pay as you earn”, or PAYE, is all about. The tax you pay in each pay period (i.e. week, fortnight, month etc.) does not just depend on how much you earn in that period; it also depends on how much you have earned in the tax year to date, i.e. since the last 6 April. The process is designed so that, at the end of the tax year, you will have paid all of the tax that is due on your earnings for the tax year.

When your employer calculates your wages, the tax is calculated first on your total earnings in the tax year to date, including your earnings for the current pay period. From that is deducted the total tax that you had paid up to the last pay period. The difference is the tax that you pay in the current pay period.

Example 1: Let’s say that you had earned £3,000 in this tax year up to last week and you have earned £300 this week. Your total earnings to date are £3,300. The tax due on that £3,300 is, say, £385. Up to last week, you had paid £350 in tax. The tax you pay this week, therefore, is £35, i.e. £385 – £350.

Example 2: You start a new job and give the P45 from your old employer to your new employer. The P45 says that your total earnings in the last employment were £6,500 and the total tax you paid was £1,050. Your earnings in the first week in the new job are £400. You have now earned £6,900 so far in the tax year and the tax due on £6,900 is, say, £1,105. Your employer deducts £55 for this week’s earnings, i.e. £1,105 – £1,050.

The same process is used throughout the year with the result that, at the end of the year, you have paid exactly the right amount of tax. This process is known as calculating tax “cumulatively”. It is how tax codes are meant to be calculated.

Calculating tax “non-cumulatively”

The other way in which tax codes can be used is called “non-cumulative”. This means that your ‘cumulative’ earnings in the year date are ignored when calculating the tax; instead tax is calculated only on your earnings in the current pay period.

As this is effectively what happens to everyone in the first pay period of the year – there are no previous earnings to take into consideration – this method is also known as calculating tax on a “week one basis” or on a “month one basis”. In other words, every time you are paid, the tax is calculated as if it were the first pay period of the tax year. You can see, therefore, where the ’1′, or the letters ‘W1′ and ‘M1′ come from. Your employer would put ‘W1′ or ‘M1′ against your tax code when completing your P60 End of Year Certificate at the tax year end. If you leave the job and your employer issues a P45, the letter ‘X’ is entered against the tax code. The letters all mean the same thing.

In what circumstances does an employer have to start calculating tax “non-cumulatively”? In simple terms, this happens in any situation where HM Revenue & Customs (HMRC) does not want your earnings in earlier pay periods to be taken into consideration. An employer may decide to calculate tax on a “week one” or a “month one” basis if an employee does not present a P45 from the previous employer and the employee completes a form P46 instead. The tax office may instruct the employer to calculate tax “non-cumulatively” if a new tax code is being issued for the employee in the middle of the tax year but, if the new code were applied cumulatively, it would apply to all of the earnings so far in the tax year, with the result that the employee would receive a large tax refund or would pay a large extra amount of tax. Applying the code “non-cumulatively” prevents this from happening as the earlier earnings are ignored.

Example 1: You start a new job but you don’t have a P45 to give to the employer. You complete a form P46 instead and you confirm on that form that this new job is now your only job but that you have had another job since last 6 April. Your employer, in this situation, has to use (for 2009/10) the tax code 647L but must apply it on a ‘W1′ or ‘M1″ basis. (See How does my employer know my tax code when I didn’t hand in a P45?)

Example 2: You start the tax year with tax code 647L. Near the end of the tax year, your tax office later learns that you have other income that must be taxed and sends your employer a coding notice with instructions to apply the new tax code 347L. If this is applied cumulatively, you would have to pay tax on a further £3,000 (i.e. £6475 – £3475), and this could mean that all of your wages are taken in tax. To prevent this, the employer is instructed to apply the code on a ‘W1′ or ‘M1′ basis, so you only pay extra tax from that pay period onwards.

If you had a “non-cumulative” tax code at the end of the tax year, you always start the new tax year with tax being calculated “cumulatively”.

More FAQs Related to Tax Codes
What does my tax code mean?
What does the letter at the end of my tax code mean?
How does my employer know my tax code when I didn’t hand in a P45?
I am a student at college or university. How can I be paid wages without paying tax?

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Payroll Update 2013