Tax Free allowance, how do the IR use it?

Spidernick

OP,

When you accuse the UK tax system of being a little 'shady' and claim that 20% tax is 'disgusting', that's the sort of thing that gets you the kind of language booksurr uses.

For the record, if you were in the UAE or Singapore, then 20% might seem a lot, but I can remember the basic rate of tax being 25% and it was 33% back in the 70s. Added to that the above-inflation increase in the personal allowance in recent years and I think it's safe to say that most people (you included) are paying a lot less tax than you might have done a few years back.

Here are the tax rates going back to 1990/91:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/418669/Table-a2.pdf

National insurance might be a different kettle of fish, of course, but governments rely on most people not noticing that!

Zammo76

CLAPTON wrote: »

your tax to date is exactly correct as you are (pro-rataed ) about 272 into 40% tax

Forgive my ignorance but what do you mean by this?

Edit.

Nevermind I think I understand now.

I've just spoken to a fiend who is an accountant and she thinks the tax on my final OT payment is too high. According to her I should only incur the 40% band if I earn over £3532 a month. Yet in September I earned £2985.62 Gross (including my separate OT payment) but was charged more than 20% tax. I'll have to query it.

p00hsticks

Zammo76 wrote: »

Tax to me is a necessary evil, unfortunately its been set at such a high rate by the current government that it is now effecting mine and a lot of other peoples ability to be able to pay the mortgage, bills, childcare, food and actually be able to have some sort of quality of life. As for me spending to much that simply is not true after I have paid out on all of the above I have a little over £100 pounds a week for myself, which I then have to use for money to eat at work and also to commute in.

!!! Basic rate Income tax is at the lowest rate it's been for decades, and the personal allowance has risen every year, so historically it's been a lot higher. The 40% band hasn't kept pace though which is where you may be losing out a bit (I notice you have no pension contributions being deducted - you might consider putting something into a pension to reduce yout taxable pay, especially if your employer contributes something as well - you are turning your back on "free money" there).

If you feel income tax is too high, then I suggest you need to start making your views felt politically (traditionally the conservatives are the party of low tax), but be prepared to say what you want the government to stop spending money on in order to balance the books.

molerat

The tax on the overtime payment cannot be looked at separately. The whole year to date has to be looked at and, as others have calculated, I make your tax to date correct within about £5. With those earnings you currently are a higher tax rate payer, if your overtime reduces and you fall back into the 20% bracket any 40% tax you have paid will be refunded. It is how the system works and for all its faults it is probably the fairest way to do it.

The way PAYE is worked on each pay packet is
total earnings to date - total tax allowance to date = total tax due to date - tax paid to date = tax due on this pay packet.

sheramber

personal allowance for year 10600

Tax calculation from April up to September

personal allownce until September 6/12 x 10600 = 5300*

pay to date 21463
less PA * 5300 = 16163 taxable
20% rate band for year 31785 , until September 6/12 x 31785 = 15893 @ 20% = 3178
balance ar 40 % 16163 - 15893 = 270 @40% = 108
total tax due to date = 3286

tax paid to date 3284 .70

Zammo76

p00hsticks wrote: »

!!! Basic rate Income tax is at the lowest rate it's been for decades, and the personal allowance has risen every year, so historically it's been a lot higher. The 40% band hasn't kept pace though which is where you may be losing out a bit (I notice you have no pension contributions being deducted - you might consider putting something into a pension to reduce yout taxable pay, especially if your employer contributes something as well - you are turning your back on "free money" there).

If you feel income tax is too high, then I suggest you need to start making your views felt politically (traditionally the conservatives are the party of low tax), but be prepared to say what you want the government to stop spending money on in order to balance the books.

I am paying into a pension but for some reason this isn't listed under the deductions section of my pay and is instead listed along with my childcare vouchers. These have both then been deducted off my salary before it states my gross earnings.

Spidernick

Zammo76 wrote: »

I've just spoken to a fiend who is an accountant

Well, it is the month of Halloween!

chrisbur

Each month you have 884.09 on which no tax is paid and then 2648.75 on which 20% tax is paid then 40% tax is paid. These figures are 1/12 of the annual allowances except that the tax free allowance is rounded up a bit. The 1060L code covers all from 10600 to 10609 so everyone gets the top end of the band. First month you get the allowances as above. Second month they are doubled then third month trebled etc. these are then set against your year to date earnings to get a tax due to date. Tax already paid is deducted to get your tax for that month.

Where you had two payments in one month I have added them together as they are treated as one payment. To get the tax figure for the second payment the tax is worked out on the total of the two and the tax already paid on the first payment is deducted.

April
3023.68 less 884.09 = 2139.59 below 2648.75 so only 20% due on 2139 (pence are ignored) Tax due 427.80

May
4045.62 plus 3023.68 = 7069.30 less 1768.18 (2 times 884.09) = 5301.12 20% band is 2 times 2648.75 = 5297.50 so 5297.50 at 20% 3.50 at 40% =1060.90 less tax paid last month of 427.80 leaves 633.10 to pay for May

June
3818.56 plus 7069.30 = 10887.86 less 2652.27 (3 times 884.09) = 8235.49 20% band is 3 times 2648.75 = 7946.25 so 7946.25 at 20% and 288.75 at 40% =1704.75 less 1060.90 tax paid so far leaves 643.85 to pay for June

July
3818.56 plus 10887.86 = 14706.42 less 3536.36 (4 times 884.09) = 11170.06 20% band is 4 times 2648.75 = 10595.00 so 10595.00 at 20% and 575.00 at 40% = 2349.00 less 1704.75 tax paid so far leaves 644.25 to pay for July

August
3770.97 plus 14706.42= 18477.39 less 4420.45 (5 times 884.09) = 14056.94 20% band is 5 times 2648.75 = 13243.75 so 13243.75 at 20% and 812.25 at 40% - 2973.65 less 2349.00 tax paid so far leaves 624.65 to pay for August

September
2985.62 plus 18477.39 = 21463.01 (agrees with gross to date) less
5304.54 (6 times 884.09) = 16158.47 20% band is 6 times 2648.75 = 15892.50 15892.5 at 20% and 265.50 at 40% = 3284.70 (agrees with tax to date ) less 2973.65 tax paid so far leaves 311.05 to pay for September

All your employer's tax calculations are spot on.

Regarding your friend the accountant you say
"I've just spoken to a fiend who is an accountant and she thinks the tax on my final OT payment is too high. According to her I should only incur the 40% band if I earn over £3532 a month. Yet in September I earned £2985.62 Gross (including my separate OT payment) but was charged more than 20% tax. I'll have to query it."

You cannot just look at this extra payment on its own to get the correct tax you have to add the two together as I did above, the tax figure for 2438.25 plus 547.37 is 148.55 plus 162.50. Because the original payment was below your average earnings some of your tax that you had paid earlier at 40% was now due at only 20% this resulted in a reduction in tax for that month. If this had been a month for a tax payer who had never gone into the 40% tax band the tax due on this would have been about £311 but you had only £148.55 deducted due to the conversion of some of your 40% tax to 20% tax. Then you had the extra payment which meant that in the original payment to much tax had been changed from 40% to 20% so now some has to go the other way from 20% to 40%. As I said earlier in practise what happens is that the two gross payments are added together and the tax is worked out in your case on a gross of 2985.62 tax due was 311.05 tax of 148.55 had already been paid so another 162.50 was due.
If you look at the total of the two payments 2985.62 if this had been paid to someone who had not paid any tax at 40% they would have paid about £420 in tax but due to you getting some 40% converted to 20% you only paid £311.05 so far from paying any tax at 40% you actually were paying tax at just under 15% that month.

chrisbur

Zammo76 wrote: »

I am paying into a pension but for some reason this isn't listed under the deductions section of my pay and is instead listed along with my childcare vouchers. These have both then been deducted off my salary before it states my gross earnings.

You are paying under the salary sacrifice scheme. In this way you do not pay tax nor national insurance on the money that pays for these things, as such it is to your advantage to pay them like this.

Zammo76

chrisbur wrote: »

Each month you have 884.09 on which no tax is paid and then 2648.75 on which 20% tax is paid then 40% tax is paid. These figures are 1/12 of the annual allowances except that the tax free allowance is rounded up a bit. The 1060L code covers all from 10600 to 10609 so everyone gets the top end of the band. First month you get the allowances as above. Second month they are doubled then third month trebled etc. these are then set against your year to date earnings to get a tax due to date. Tax already paid is deducted to get your tax for that month.

Where you had two payments in one month I have added them together as they are treated as one payment. To get the tax figure for the second payment the tax is worked out on the total of the two and the tax already paid on the first payment is deducted.

April
3023.68 less 884.09 = 2139.59 below 2648.75 so only 20% due on 2139 (pence are ignored) Tax due 427.80

May
4045.62 plus 3023.68 = 7069.30 less 1768.18 (2 times 884.09) = 5301.12 20% band is 2 times 2648.75 = 5297.50 so 5297.50 at 20% 3.50 at 40% =1060.90 less tax paid last month of 427.80 leaves 633.10 to pay for May

June
3818.56 plus 7069.30 = 10887.86 less 2652.27 (3 times 884.09) = 8235.49 20% band is 3 times 2648.75 = 7946.25 so 7946.25 at 20% and 288.75 at 40% =1704.75 less 1060.90 tax paid so far leaves 643.85 to pay for June

July
3818.56 plus 10887.86 = 14706.42 less 3536.36 (4 times 884.09) = 11170.06 20% band is 4 times 2648.75 = 10595.00 so 10595.00 at 20% and 575.00 at 40% = 2349.00 less 1704.75 tax paid so far leaves 644.25 to pay for July

August
3770.97 plus 14706.42= 18477.39 less 4420.45 (5 times 884.09) = 14056.94 20% band is 5 times 2648.75 = 13243.75 so 13243.75 at 20% and 812.25 at 40% - 2973.65 less 2349.00 tax paid so far leaves 624.65 to pay for August

September
2985.62 plus 18477.39 = 21463.01 (agrees with gross to date) less
5304.54 (6 times 884.09) = 16158.47 20% band is 6 times 2648.75 = 15892.50 15892.5 at 20% and 265.50 at 40% = 3284.70 (agrees with tax to date ) less 2973.65 tax paid so far leaves 311.05 to pay for September

All your employer's tax calculations are spot on.

Regarding your friend the accountant you say
"I've just spoken to a fiend who is an accountant and she thinks the tax on my final OT payment is too high. According to her I should only incur the 40% band if I earn over £3532 a month. Yet in September I earned £2985.62 Gross (including my separate OT payment) but was charged more than 20% tax. I'll have to query it."

You cannot just look at this extra payment on its own to get the correct tax you have to add the two together as I did above, the tax figure for 2438.25 plus 547.37 is 148.55 plus 162.50. Because the original payment was below your average earnings some of your tax that you had paid earlier at 40% was now due at only 20% this resulted in a reduction in tax for that month. If this had been a month for a tax payer who had never gone into the 40% tax band the tax due on this would have been about £311 but you had only £148.55 deducted due to the conversion of some of your 40% tax to 20% tax. Then you had the extra payment which meant that in the original payment to much tax had been changed from 40% to 20% so now some has to go the other way from 20% to 40%. As I said earlier in practise what happens is that the two gross payments are added together and the tax is worked out in your case on a gross of 2985.62 tax due was 311.05 tax of 148.55 had already been paid so another 162.50 was due.
If you look at the total of the two payments 2985.62 if this had been paid to someone who had not paid any tax at 40% they would have paid about £420 in tax but due to you getting some 40% converted to 20% you only paid £311.05 so far from paying any tax at 40% you actually were paying tax at just under 15% that month.

Thanks a lot for looking into this in so much depth. Its really appreciated! I tend to agree with people on here and think my friend doesn't have the full figures in front of her, which is why she's miscalculated.

Goes to show though that if an accountant is getting it wrong what hope has the average person with little knowledge of the system have!