
27/06/2024Accounting , tax , Tax Saving Tips , Taxation
Are you wondering how much is emergency tax if you’re starting a new job, receiving benefits, or becoming self-employed and want to understand how your tax is affected? Emergency tax is a temporary measure put in place by HMRC. This is to ensure individuals pay some tax until their correct tax code is sorted out. It’s a common experience for many people in the UK.
But it can be confusing and stressful if you’re not prepared. In this discussion, we’ll break down the ins and outs of emergency tax, exploring what it is, how it works, and most importantly, how to reclaim any overpaid tax. If you’re a taxpayer, an employer, or simply looking for a better understanding of the UK tax system, this conversation is for you. So let’s dive in and demystify emergency tax together.
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What are the Circumstances Leading to Emergency Tax?
The circumstances that lead to emergency tax in the UK are broken down in the following:
New Job or Employment
When you start a new job, your employer may not have all the necessary information to give you the correct tax code. In this case, they will use an emergency tax code to ensure you pay some tax until your correct code is sorted out. This is especially common if you’re starting work for the first time, returning to work after a break, or switching jobs.
Benefits and Pensions
If you receive benefits like Universal Credit, Employment and Support Allowance, or a state pension, you may be put on an emergency tax code. This is because these benefits are taxable, and HMRC needs to ensure you’re paying the right amount of tax.
Self-Employment
When you become self-employed, you’ll need to notify HMRC and register for Self Assessment. Until you’ve done this and received your correct tax code, you may be put on an emergency tax code. This is to cover any tax owed on your self-employment income.
Other situations that may lead to emergency tax include:
- Receiving a taxable lump sum, like a redundancy payment
- Starting to receive income from renting out a property
- Having a change in your income or tax circumstances that HMRC isn’t aware of
- Failing to complete a Self Assessment tax return or pay the tax owed
In all these cases, HMRC may apply an emergency tax code to ensure you’re paying some tax until your correct tax code is sorted out. It’s good to note that emergency tax codes are temporary and can be corrected once you’ve provided the necessary information to HMRC.
How Much is Emergency Tax?
The emergency tax rate in the UK for the 2024/25 tax year is 1257L/M1. This rate is applied to your income until HMRC confirms your correct tax code.
When the emergency tax code is applied, you will pay:
- 0% on the first £1,047.50 of your income (personal allowance)
- 20% on the next £3,141.67 (basic rate)
- 40% on the next £7,286.67 (higher rate)
- 45% on any income above £18,524.16 (additional rate)
Let’s say you receive a pension income of £30,000. Using the emergency tax code 1257L M1, the tax calculation would be:
- Personal allowance: £1,047.50 (0% tax)
- Basic rate: £3,141.67 (20% tax = £628.33)
- Higher rate: £7,286.67 (40% tax = £2,914.67)
- Additional rate: £18,524.16 (45% tax = £8,335.87)
Total tax payable: £11,878.87
What are the Scenarios of Emergency Tax in the UK?
Example 1: New Job, New Tax Code
Meet Sarah, who just started a new job as a marketing manager. Her employer doesn’t have her correct tax code yet, so they put her on the emergency tax code 1257L/M1. Sarah’s monthly salary is £3,500. Until her correct tax code is sorted out, she’ll pay £642 in tax each month (£7,704 per year). Once her correct tax code is applied, she’ll pay £495 in tax each month (£5,940 per year), and she may even be eligible for a tax refund.
Example 2: Pension Income
John, a retired teacher, receives a £20,000 annual pension. HMRC applies the emergency tax code 1257L/M1, and John pays £4,200 in tax (21% of his pension income). After submitting his tax return and confirming his correct tax code, John pays £2,400 in tax (12% of his pension income), and he receives a £1,800 tax refund.
Example 3: Self-Employment
Emily starts her own business as a freelance writer. She registers for self-assessment but doesn’t receive her correct tax code immediately. HMRC applies the emergency tax code 1257L/M1, and Emily pays £2,500 in tax on her first £10,000 income. Once her correct tax code is applied, she pays £1,500 in tax and may be eligible for a tax refund.
Example 4: Benefits and Tax Credits
David receives Universal Credit and works part-time. HMRC applies the emergency tax code 1257L/M1, and David pays £1,200 in tax on his £8,000 income. After his correct tax code is applied, he pays £600 in tax, and he receives a £600 tax refund.
How Can I Claim Overpaid Tax?
If you’ve been put on an emergency tax code, you may have paid too much tax. This can happen when your employer uses the wrong tax code or when HMRC hasn’t updated your tax code after a change in your circumstances. The good news is that you can reclaim the overpaid tax. First, check your payslip or P60 to see if you’re on an emergency tax code (1257L/M1). If you are, and you think you’ve paid too much tax, contact HMRC to confirm.
To reclaim overpaid tax, you’ll need to fill out the correct form:
- P50Z: If you’re no longer working for the employer who overpaid tax.
- P53Z: If you’re still working for the employer who overpaid tax
- P55: If you’re self-employed or receiving a pension
You can download these forms from the HMRC website or request them by phone.
To complete the form, you’ll need:
- Your National Insurance number
- Your employer’s name and address
- Your payslip or P60
- Details of the overpaid tax
Send the completed form to HMRC, and they’ll process your refund. If you’re due a refund, HMRC will send you a cheque or pay it into your bank account. Make sure to reclaim overpaid tax within the time limits:
- 4 years from the end of the tax year in which the overpaid tax was deducted
- 1 year from the date you received your P60 (if you’re no longer working for the employer)
The Bottom Line
In conclusion, how much is emergency tax, emergency tax in the UK is a temporary measure that ensures individuals pay some tax until their correct tax code is sorted out. While it may seem daunting, understanding how emergency tax works and being aware of the circumstances that lead to it can help alleviate stress and financial uncertainty. By recognising the signs of emergency tax. For example an unexpected increase in tax deductions. Also, by taking proactive steps to reclaim overpaid tax, individuals can avoid unnecessary financial burdens.
Emergency tax is not a permanent solution, and HMRC is committed to ensuring accurate tax codes are applied once all necessary information is received. If you suspect you’re paying emergency tax or have overpaid tax, don’t hesitate to contact HMRC or a tax professional for guidance. With the right knowledge and support, you can navigate the emergency tax system with confidence. This is to ensure you’re paying the right amount of tax.
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Disclaimer: The general information provided in this blog about how much is emergency tax includes text and graphics. It does not intend to disregard any of the professional advice in the future as well.