How come the Basic Rate Code and the Emergency Tax code are the same?

Londina

They are both 647L for this financial year 2010/2011, same as last year's basic rate and it's also the emergency tax one!!
Why HMRC did this? don't they realise that will cause confusion? How do a person know if he/she is paying the correct tax?

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/IncomeTax/Taxcodes/DG_078568

I'm shocked!!

Monsoon

The "emergency" tax code is always the same as the "normal" one - its the W1/M1 that makes it emergency.

The personal allowance didn't change which is why it was 647L last year and this year.

truecockney

Just to further on Monsoon, the Labour Government at the time noticed that we were in negative growth and rather than reduce the Personal Allowance, they kept it stable (thereby "increasing" it in comparison to growth, but with the inflationary figures meant we were worse off in comparison with last year).

On the plus side, they didn't have to release quite so many tax code notices this year as normal!

sdv

Londina wrote: »

They are both 647L for this financial year 2010/2011, same as last year's basic rate and it's also the emergency tax one!!

every person who's working is entitled to free taxable pay of £6475 per year. Divide this by 10 and you get 647

if the code is 647L - it means that it is a cummulative code. ie £6475/52 = £124.52. an employee earning £400 (week 1) is only taxed on £275.48. The first £124.52 is tax free pay.

the same employee in weeks 2 falls ill and did not earn any thing. BUT his £124.52 is not used up. therefore it can be carried on to week 3

In week 3 the same employee earns £400 but the free pay is now (124.52 x 2 )= £249.04. Therefore he only pays tax on (£400 - 249.04)= 150.96. this carry forward of unused free pay tax can only happen if the tax code is Cummulative (suffix, L, P.....etc)

BUT if it was an EMERGENCY code ie 647 "W1" then an employee is only entitled to £124.52 free pay per week. Any unused freepay CAN NOT be carried forward.

Therefore in the above example in week 3 the employee's taxable pay would be (400 - 124.52) = £275.48

Londina wrote: »

Why HMRC did this? don't they realise that will cause confusion?

It's a tried and tested method. It's worked for years. It is not confusing at all if you learn "how the pay roll works".

Londina wrote: »

How do a person know if he/she is paying the correct tax?

when an employee joins a company, the tax code will be on it. If the employee does not have a P45, then the new employer will have fill in a P46/P47 and sent to HMRC, who will in time inform the employer of that employee's correct tax code.

The second alternative is to ask an AAT qualified accountant, who should be able to work it out.

Londina wrote: »

I'm shocked!!

Something for the CPD to update the knowledge

payrollpro

SDV is correct, the emergency code is not week 1/month 1, it is cumulative. It is critical that you follow the instructions on the P46 and apply the designated code related to the box ticked by the employee.

You should never use 647LW1 as the emergency code.

In fact its true name is the code for emergency use.

Payrollpro

Monsoon

The reason I describe 'true' emergency tax being 647L with the W1/M1 indicator, is because this often results in a higher tax deduction for the employee. In layman's terms, emergency tax means "argh, I'm getting far more tax taken off my pay than I think I should be" and that usually means W1/M1.

PAYE usually gets it right in the case of people with one job who switch jobs with a P45, or people with 2 jobs where the first job is using up all the personal allowance and the second is code BR. It's when people have a few low-paid jobs that too much tax can get taken, or if P46 procedures aren't followed properly.


.....And when HMRC issue tons of rubbish tax codes. Not that they'd ever do that. Much.

A-Vic

Monsoon wrote: »

.....And when HMRC issue tons of rubbish tax codes. Not that they'd ever do that. Much.

lolol

Londina

sdv wrote: »

It's a tried and tested method. It's worked for years. It is not confusing at all if you learn "how the pay roll works".

thanks for the explanations SDV....I don't really know how payroll works (and probably the 80% of the population) therefore I disagree to use this method, HMRC also issues other tax codes, they could issue a completely separate one for emergency tax code.

Now I did a temp job for 2 weeks and in the P45 they used code 647L and tick the box "Week 1/Month1". So I did pay emergency tax or not? who knows...

A-Vic

yes and the prob reasons for this are

1 your P45 from previous employer indicated this and will till a coding notice has been received to amend this.
2 your P45 wasnt passed on when payroll was proceesed.

Londina

A-Vic wrote: »

yes and the prob reasons for this are
1 your P45 from previous employer indicated this and will till a coding notice has been received to amend this.
2 your P45 wasnt passed on when payroll was proceesed.

Cheers!

But:

1 my previous P45 didn't indicate this
2 I passed the P45 to the new job after the 1st payslip was done, but they didn't amend the payroll anyway afterwards on the following payslips! >:-(

payrollpro

Londina,

If the code was W1/M1 it wasn't the emergency code. As we seem to have agreed the emergency code is 647L, cumulative and is only used on a W1/M1 basis if either the employee completes a P46 and ticks Box B on the form or if HMRC issues a specific instruction to operate it. All other uses of W1/M1 are wrong.

If the P45 quotes 647L W1/M1 then obviously it must be operated but then, technically, that is not the emergency code, it is the proper code transferred from the previous employer.

I wish more people understood the process, though I know it can be complex and completely mad sometimes, because employers and particularly agencies who misuse codes should be dealt with for failing to operate the PAYE system in accordance with the regulations.

One client of mine operated D0 (i.e. all at 40% income tax) from the P46 because they knew the employee concerned was liable to tax at 40% and both emergency code and BR would mean him underpaying tax. Well so what, the rules are very straightforward and if, as in this case, the employee ticked Box A on the P46 the correct code is 647L cumulative and any underpayment of income tax is between him and HMRC. EMployers fiddle around with this process at their peril.

Payrollpro

Londina

payrollpro wrote: »

Londina,

If the code was W1/M1 it wasn't the emergency code. As we seem to have agreed the emergency code is 647L, cumulative and is only used on a W1/M1 basis if either the employee completes a P46 and ticks Box B on the form or if HMRC issues a specific instruction to operate it. All other uses of W1/M1 are wrong.

Payrollpro

many thanks! I'm glad I have never study payroll, as it's so confusing!!

deanshepherd

payrollpro wrote: »

If the code was W1/M1 it wasn't the emergency code. As we seem to have agreed the emergency code is 647L, cumulative..

I'm not sure who you 'agreed' that with as it contradicts every comment before yours.

Most people in the profession (as do I) refer to 647L W1M1 as the 'emergency code'.

Although, technically, you are of course correct.

payrollpro

Dean,

Yes, I agree, it wasn't really agreed, but I agreed so I thought I'd impose it instead, i hope I am forgiven.

Nevertheless, I want to see people operate the rules much more diligently because I know from my work with HMRC on behalf of AAT that there will be a clamp down on such practices and a greater emphasis on employers and their agents abiding by the rules.

Not so long ago the guidance was a bit weak and unclear but now it couldn't be clearer and I think HMRC is right to expect that in response to that we start doing things better.

Payrollpro