Why am I paying tax before reaching my tax free allowance?

tom8521

I was once told that my tax code allowed my to earn
£10,000 per year - tax free.

However, when hitting £8,500 in earnings I have
automatically started paying tax.

My tax code is: 1000LN

Am I misunderstanding my tax code,
or is something wrong?

Guineapigsqueaks

The threshold for National Insurance contributions is lower, just under £8,000. Is it this that has been taken, rather than income tax?

tom8521

They take both. I have paid NI for a while,
but only the last few pays have included Tax too.

cte1111

The PAYE system presumes that you will carry on earning at the current rate until the end of the tax year. So by the end of this tax year, you will have earned more than the £10,000 tax free amount. The tax payable is therefore spread over the months, rather than being taken all in one lump at the end of the tax year.

tom8521

That's still confusing to me.

If I can earn up to £10,000... why dont they just charge me tax on payments after that amount?

That makes more sense to me, instead of ahead of time.

Caz3121

is this a new job?
the usual on PAYE is to have the annual allowance split by pay periods
eg if you are monthly paid you have 1/12 of 10000 tax free each month, if weekly 1/52 each week
If you had not been working earlier in the tax year then you may have stored up some unused allowance
If your total taxable income for the full tax year ends up being under the allowance, you will get any paid tax refunded

>>If I can earn up to £10,000... why dont they just charge me tax on payments after that amount?>>
so assuming someone earns £24k per year
how difficult to budget would it be if for 5 months of the year you ended up taking home £2k (less NI) per month and then for the next 7 months under £1,600 PAYE does not work like that

custardy

tom8521 wrote: »

That's still confusing to me.

If I can earn up to £10,000... why dont they just charge me tax on payments after that amount?

That makes more sense to me, instead of ahead of time.

because most normal people would prefer the tax to be taken at a relatively even amount each week/month.

tom8521

I've been in the same job for 3 years, but recently got a promotion and now do more hours, and get more money.

Technically, by April 1st, I should only have to pay tax on about £550.

By then I'll have been charged (if this continues) £125.

Does that sound about right?

comeandgo

Well you will be taxed at 20% so that would be £110. If you have paid too much tax you will get it back.

Guineapigsqueaks

You'll pay 20% income tax on everything you earn over £10,000. So an extra £550 earned, you'll pay £110 tax on it.

Guineapigsqueaks

Oops. Sorry Comeandgo. You beat me to it :-).