Your first payslip looks wrong: emergency tax codes explained

You start a new job, you know what the offer said, and then the first payslip
arrives a few hundred pounds light. Before you email payroll in a panic, look at
the tax code printed on it. If it ends in W1, M1
or X — or the payslip says NONCUM
— you are on an emergency tax code, and nothing has gone wrong that will
not fix itself.

What an emergency tax code actually does

Your Personal Allowance is an annual figure, spread across the year. Normally
payroll works cumulatively: it knows what you have earned and what tax you have
paid so far this tax year, and adjusts each payslip so the total comes
out right by April.

An emergency code cannot do that, because your new employer does not yet have
your figures from the old job. So it treats each pay packet in isolation and
taxes it, in HMRC’s words, “as if you’re paid that amount every week or month of
the year”. Every payslip starts from scratch.

Why you have been put on one

It is almost always one of three things:

• Your new employer has not got your P45. This is the common
  one. Until the old employer’s figures arrive, there is nothing to work from.
• You have started getting company benefits — a car,
  private medical cover — which have to be coded in.
• You have started receiving the State Pension alongside
  employment.

It is not a penalty, it does not mean HMRC thinks you have done something
wrong, and it happens to a very large number of people every year.

How much is it costing you?

Run your salary through our take-home pay calculator. That
gives you the figure a standard tax code would produce. The gap between that and
your payslip is roughly what the emergency code is holding back.

Be aware of one thing when you compare: the calculator assumes a full year on
a standard code. If you started mid-year, your correct tax for these first months
is actually lower than the calculator suggests, because you have a whole
year’s allowance to use up in fewer months. So the real overpayment can be bigger
than the gap you see.

How to get it fixed

In order of how much difference it makes:

1. Give your employer your P45 from the last job. This is the
   fastest route by a distance. It carries the figures payroll needs, and the code
   usually corrects on the next run.
2. No P45? Complete the new starter checklist your employer
   gives you, honestly and in full. Ticking the wrong statement on it is a common
   cause of the code being wrong for months.
3. Check your Personal Tax Account on GOV.UK. You can see what
   HMRC currently believes about your jobs and income, and tell them if a previous
   employer is still listed as live when you have left.
4. Wait. HMRC says updating your code can take up to 35 days
   from starting the job. Most corrections land inside one or two pay runs.

Do you have to claim the refund?

Usually not. Once the correct cumulative code reaches your employer, the next
payslip does the arithmetic for the whole year at once, and the overpaid tax
comes back as a larger-than-usual net pay. You do not fill anything in.

The exception is if the tax year ends before your code is fixed. Then the
refund goes through HMRC rather than your employer, and they will normally
contact you about it after April. If the year has ended and you have heard
nothing, contact HMRC directly rather than waiting.

What to check on the payslip afterwards

When the code corrects, look for three things: the code no longer ends in W1,
M1 or X; the year-to-date tax figure has gone down or your net pay has
jumped; and the code itself looks sensible for your circumstances. If you have
one job, no benefits and no unusual allowances, a standard code is what you
expect to see.

One thing worth not doing

Do not quietly accept it for a year on the basis that “it comes back
eventually”. It does come back — but an interest-free loan to HMRC for
eleven months is a real cost when you are budgeting around a new job. The P45
takes a minute to hand over.