Cumulative tax codes (e.g. 1257L)
Most people are on a cumulative tax code. You can identify a cumulative code because it does notinclude ‘W1’ or ‘M1’. It means your tax is calculated on your overallyear-to-date earnings.
The tax due on each payment is determined after taking into account any tax you’ve already paid this year and how much of your accumulatedtax-free personal allowancehas been used. In other words, it looks atthe whole picture.
This has the advantage of meaning any unused allowance rolls over to future weeks. This could arise after a gap without pay, if you start working part-way through the tax year or when your earnings are lower than your allowance.
Non-cumulative tax codes (W1 or M1)
If you see W1 or M1 attached to your tax code, it means your tax is calculatedonlyon your earnings in thatindividual pay period.
The tax due on each payment is determined without taking into account any tax you’ve already paid this year or how much of yourpersonal allowancehas been used. In other words, it only looks at anisolated viewof that period.
This has the disadvantage of meaning any unused allowance willnotroll over to future pay periods, which could result in your paying too much tax.
What does this mean? An example:
John earns £300 gross each week. He works in Weeks 1 and 2 of the tax year, then spends Weeks 3 and 4 relaxing on the beach. How much tax does he pay when he returns to work in Week 5?
Well, it depends whether he’s on a cumulative or non-cumulative tax code.
Scenario 1: Cumulative Code (tax is calculated on total earnings for the year-to-date)
In week one, John would pay £11.60 in tax based on gross earnings of £300, and a £242 tax-free allowance
In week two, his year to-date (YTD) gross earnings would be £600, and the cumulative tax-free allowance would be £484. The tax due, however, would still only be £11.60 since one week’s tax-free allowance of £242 applies to one week’s salary of £300.
| Week 1 | Week 2 | Week 3 | Week 4 | Week 5 | |
|---|---|---|---|---|---|
| Gross pay(year-to-date) | £300 | £600 | £600 | £600 | £900 |
| Tax-free allowance(year-to-date)* | £242 | £484 | £726 | £968 | £1210 |
| Tax owed(year-to-date)* | £11.60 | £23.20 | £0 (= £23.20 overpayment) | £0 (= £23.20 overpayment) | £0 (= £23.20 overpayment) |
| Tax deduction/rebate | £11.60 | £11.60 | £0 | £0 | £23.20 |
Week 1
- Gross pay (year-to-date): £300
- Tax-free allowance (year-to-date)*: £242
- Tax owed (year-to-date)*: £11.60
- Tax deduction/rebate: –£11.60
Week 2
- Gross pay (year-to-date): £600
- Tax-free allowance (year-to-date)*: £484
- Tax owed (year-to-date)*: £23.20
- Tax deduction/rebate: –£11.60
Week 3
- Gross pay (year-to-date): £600
- Tax-free allowance (year-to-date)*: £726
- Tax owed (year-to-date)*: £0 (= £23.20 overpayment)
- Tax deduction/rebate: £0
Week 4
- Gross pay (year-to-date): £600
- Tax-free allowance (year-to-date)*: £968
- Tax owed (year-to-date)*: £0 (= £23.20 overpayment)
- Tax deduction/rebate: £0
Week 5
- Gross pay (year-to-date): £900
- Tax-free allowance (year-to-date)*: £1210
- Tax owed (year-to-date)*: £0 (= £23.20 overpayment)
- Tax deduction/rebate: +£23.20
John doesn’t work in weeks three and four, so the weekly tax-free allowance is carried over for both weeks. When John next works in week five, his YTD earnings are £900, but since the tax-free allowance has carried over, this now amounts to £1210. Because his gross earnings are lower than the tax-free allowance at this point, John pays no tax in week five, and receives a rebate of £23.20 for the tax paid up to that point.
Scenario 2: Non-Cumulative Code(tax is calculated only on earnings that week)
In weeks one and two, John would pay £11.60 in tax based on gross weekly earnings of £300, and a £242 weekly tax-free allowance.
| Week 1 | Week 2 | Week 3 | Week 4 | Week 5 | |
|---|---|---|---|---|---|
| Gross pay (weekly) | £300 | £300 | £0 | £0 | £300 |
| Tax-free allowance (weekly)* | £240 | £240 | £240 | £240 | £240 |
| Tax owed (weekly)* | £11.60 | £11.60 | £0 | £0 | £11.60 |
| Tax deduction/rebate | –£11.60 | –£11.60 | £0 | £0 | –£11.60 |
John doesn’t work in weeks three or four, but in week five the tax is calculated in exactly the same way as weeks one and two, so instead of paying no tax and receiving a rebate, John pays the same £11.60 tax.
*Weekly tax-free allowance is calculated at £12,570 divided by 52 (weeks in the year). Tax owed is calculated at 20% of the gross pay minus tax-free allowance. These figures do not apply to people living in Scotland, but the principle is the same.
Changing your tax code
If you believe that your code doesn’t best suit your circ*mstances, find outhow to change your tax code.
These figures are correct for the 2023/24 tax year.
