Taxation Scenario

02/05/2019 09:15:10
Hello HMRC,
Please could you confirm the correct taxation principle in the following scenario.
A member is paid on a Month 1 basis.
We are in tax month 1. He is paid £300 under 850L (M1) tax code and taxed appropriately.
His tax code then changes to 650L.
He is then paid a further £200 (still in tax month 1). Should just this additional £200 be taxed under 650L or should the whole £500 received in month 1 be taxed under 650L (essentially reassessing the tax on the first £300).

Also please could you have a look at my additional comment on K0 tax codes in another post.



Re:Taxation Scenario

07/05/2019 11:39:41
I have assumed that the employee is monthly paid and that the £200 is an ad hoc payment within the first month of the tax year.

You have stated that the code in use was 850L (M1). A code on a M1 basis will not be issued by HMRC for use in the first month of the tax year. The purpose of the M1 basis is to stop any underpaid tax from previous months being collected in a tax month when a code is lowered.

You have not stated when the code of 850L (M1) was issued but you should have followed the guidance issued on the form P9X which tells you to increase any codes with L suffixes by 65. It also tells you not to carry forward from 2018/2019 any W1/M1.

You have not said when the code change to 650L was notified to you. In this case the tax free pay on the lower code of 650L for the first month of the tax year is £542.42, so there is no liability to tax.

The ad hoc payment should be notified on an additional FPS.

The K0 code issue, HMRC is aware of this. The guidance we issue is to use K1 codes. We are aware that the code may not be in the correct format but the issue of the codes is quite rare.