Tax (PAYE) at 40% Calculation question

chutuk

Hi Guys,

Hoping you can help answer my question regarding the calculation of tax at the higher rate for the upcoming tax year.

I've recently had a promotion to a role that has a basic salary of £38k per year. There is also an element of on-call, and overtime work which has historically been around 10k per year depending on the amount of projects on-going or faults reported. (Can realistiaclly range between £8-12k)

After pension deductions I hypothetically may pass the £46,350 threshold. Especially if the tax office look at my salary for 1 month and multiply by 12 to find an average.

My question is, is tax over the 40% threshold 'estimated' based on your monthly gross salary or does it only get charged once your YTD figure crosses the £46,350 point.

Basically, there may be months early in the tax year where my gross pay may be over £4000 due to existing projects and on-call commitments (which when multipled by 12 would put me over the limit) however this may be followed by months with not much overtime where Gross pay x 12 is under the limit.

If this is the case and my total pay remains under £46,350 for the year (or I make additional AVCs to my pension to avoid the threshold) will I have to claim back any tax paid at 40% at the end of the year or do HMRC only become interested one I pass the threshold?

There are no student loans , company cars or other allowances to consider.

Hope this makes sense, and many thanks
A

chrisbur

chutuk wrote: »

Hi Guys,



My question is, is tax over the 40% threshold 'estimated' based on your monthly gross salary or does it only get charged once your YTD figure crosses the £46,350 point.



Hope this makes sense, and many thanks
A

Neither of these is the way PAYE works.

You will be allowed 1/12 of your tax free allowance and your 20% band allowance in the first tax month. In the second tax month you will be allowed 2/12 in the third 3/12 and so on.
Each month your taxable income to date will be compared to these allowances to find your tax due to date. From this your tax already paid is deducted to get your tax to pay that month. If you go over these allowances then that part that is over will be taxable at 40%.
In this way if your earnings go up and take you into 40% tax band you pay some at that rate; but if later your earnings drop and you fall out of the 40% tax band the tax you paid at 40% is converted to tax at 20% and reduces your tax for that month.
In this way when you get to month 12 the correct tax will have been paid for your tax code.
Only time this will fall down is if for any reason you are put onto a non-cumulative tax code then you may not pay the correct tax or of course if your tax code is wrong.

chutuk

Brilliant, thanks for that explanation. It does kind of make sense I guess!

Thanks for your help.