m1/w1 tax code and underpayment

A question about : m1/w1 tax code and underpayment

Hi,

Currently going out of my mind with worry and would be very grateful of any advice please.

For the tax year 13/4 I began a new job in April and continued to be s/e until august. I had a one off lump payment in August (PAYE) which took my PAYE earnings to Ј51k.

I filled in a P46 in April and (wrongly) ticked box C assuming that self employment was a job and was placed on a BR code.

Following the lump payment, payroll advised me to phone HMRC to get a new tax code. I did, and having established earnings to date and profit from s/e for next tax return, I was placed on a 944L W1/M1 tax code. Based on these figures I was advised that there was a small amount of PAYE tax owing which could be added to my S/e earnings and that I would not pay more than Ј2500 in total for both.

My tax bill was actually 3.5 times this and needless to say I am feeling rather stressed. I have paid the expected amount and have agreed a payment plan for the rest but I really don't understand how this has happened.

Can anyone please explain (in very simple terms!) how or why this has happened? I'd be very grateful of any insight. Thank you in advance

Best answers:

• Essentially, from April to August/September depending on when the code change was implemented, you have paid no tax at all at 40%, plus, and profits you made from self employment will also be charged at least at 40% depending on your total income.
  It's also possible that your self emp profits were enough that you would have to pay class 4 NIC's which may not have been taken into account.
  Without knowing all the figures, plus your pay/tax to date details as of August 2013 it's impossible to say whether or not the advice you were given was correct or not. Not that it will make any difference to the amount owed.
• Thank you so much for replying.
  I've looked at the figures until the code change and as I was paying BR the figures were more or less ok until that time - if I'm doing it correctly! I paid 10,200 tax on the 51k.
  I was expecting to pay 40% on my self assessment income, which again tallied with the figures that were given to me and is what I had put aside to pay.
  I really don't understand the w1/m1 bit though. At the point my tax code changed I was already over the threshold so would the payroll automatically deduct 40% or continue to take 20%?
  In the telephone conversation with HMRC I double checked that no nasty surprises would be in store when I completed my self assessment and was reassured that the absolute maximum for s/e and PAYE underpayment would be 2500. I also checked four times with the payroll company that everything was paid.
  Forgive me if I sound a bit daft but it's been years since I was on PAYE and I am utterly confused....
• Having looked at the amounts and what is due, they are correct. But I cannot understand how this happened.
  It looks as if all payments post code change were taxed at the lower threshold rather than the 40% which has resulted in my self assessment throwing up the underpayment. I wish I had noticed it at the time but unfortunately have a very ill child and was not in the habit of checking things which were being dealt with by a payroll company that we pay to ensure our affairs are in order.
  There is the possibility that I will receive another one off payment and I need to understand how this happened so that I can make sure it never happens again. I'm not trying to avoid paying by the way!
• Sorry, I'm waffling and not explaining well.
  I should have been paying 40% tax on all payments post tax code change, so what tax code should have been applied to make that happen?
• The fact that you were on a M1/W1 code after August means that you were taxed on one month's income at a time with no reference to previous income.
  I paid 10,200 tax on the 51k.
  So you only paid 20% tax on a payment that should have incurred some at 40% after the unused personal allowances - due to BR code - had been given
  That is why you were put on M1/W1 code. If you had been on a cumulative code you would have a huge tax bill the first month it was used as the underpayment of the 40% tax due would have been charged in one.
  The tax charged after the code change was correctly cgarged according to the current income with no refernce to the lump sum.
  So your tax due at the end of the year is the 40% due on your self employment plus the under paid tax on the lump sum.
  Whoever told you you would only be due Ј2500 either miscalculated, not realising that there was a large under payment on your large PAYE income for August, or did not have all the relevant information.It was incorrect to say there would only be a small underpayment of PAYE tax.
  As long as you are on a cummulative code number- not m1/w1- then this situation will not arise this year.
  It is not a fault of the payroll company as they can only deduct the tax due according to the code number issued by HMRC.
• Thank you both for your replies. it was hmrc who gave me the amount of 2500 max, the day they changed the tax code. We went all through the figures and the 40% underpayment was supposed to be included in my sa making the total a max of 2500.
  The w1/m1 was changed to a normal code in november 14 so fingers crossed everything will now be ok.
  Thanks again for your help