Calculating Tax & NI on monthly bonuses

Expertmoneyman

I understand the tax system and can calculate income tax and national insurance deductions while considering pension contributions, etc. without any issue. What I don't understand and can't seem to find much literature on is how tax is calculated for a variable income due to monthly bonus payments. Can anyone explain in detail or point me to a detailed explanation of how this would be calculated month on month please? I have created a spreadsheet that calculates deductions but I'd like to include bonus payments within it and ensure a high degree of accuracy.

General_Grant

Expertmoneyman wrote: »

I understand the tax system and can calculate income tax and national insurance deductions while considering pension contributions, etc. without any issue. What I don't understand and can't seem to find much literature on is how tax is calculated for a variable income due to monthly bonus payments. Can anyone explain in detail or point me to a detailed explanation of how this would be calculated month on month please? I have created a spreadsheet that calculates deductions but I'd like to include bonus payments within it and ensure a high degree of accuracy.

You have to look at the total received for the tax year to date, not for individual months in isolation. So you need to have cumulative calculations.

Dazed_and_confused

You can use the calculators from this link to check your own calculations.

https://www.gov.uk/government/collections/how-to-manually-check-your-payroll-calculations

If you are on a cumulative tax code then the tax one allows you to include the cumulative pay and tax from the previous pay period.

NIC is non cumulative.

Expertmoneyman

Yes I assumed that would be the case but that doesn’t give me detailed info on how it’s calculated for monthly deductions. Are you saying monthly deductions are based on an average of the annual accumulation?

Dazed_and_confused

Sort of. Say you are being paid in month 3 of the tax year.

Month 1 taxable pay = £3,000
Month 2 taxable pay = £3,000
Month 3 taxable pay = £7,000

The taxable pay in each of the first two months is equal to £36,000/year. The taxable pay after month three is the equivalent of £52,000 so if you are on the emergency tax code of 1250L on a cumulative basis a little but of higher rate tax would be payable in the third month (you get 3/12ths of your tax code allowances, 3/12ths of the basic rate band etc).

If month four taxable pay was £3,000 your annualised pay would drop to £48,000 so no higher rate tax would be due and you would the benefit of less tax in your month 4 payslip.

molerat

I made up my own spreadsheet as that was the only way to get an accurate month on month view, all these websites are pretty poor on variable incomes. Quite simple to do if you understand how the PAYE system works.

Expertmoneyman

molerat wrote: »

I made up my own spreadsheet as that was the only way to get an accurate month on month view, all these websites are pretty poor on variable incomes. Quite simple to do if you understand how the PAYE system works.

I'd be interested to get my hands on that and save myself some work if you're willing?

Expertmoneyman

Dazed_and_confused wrote: »

Sort of. Say you are being paid in month 3 of the tax year.

Month 1 taxable pay = £3,000
Month 2 taxable pay = £3,000
Month 3 taxable pay = £7,000

The taxable pay in each of the first two months is equal to £36,000/year. The taxable pay after month three is the equivalent of £52,000 so if you are on the emergency tax code of 1250L on a cumulative basis a little but of higher rate tax would be payable in the third month (you get 3/12ths of your tax code allowances, 3/12ths of the basic rate band etc).

If month four taxable pay was £3,000 your annualised pay would drop to £48,000 so no higher rate tax would be due and you would the benefit of less tax in your month 4 payslip.

So the accumulative figure for the year divided by the number of months passed and multiplied by 12 gives the estimated annual income and then apply the usual PAYE calculations to work out deductions?

Expertmoneyman

molerat wrote: »

I made up my own spreadsheet as that was the only way to get an accurate month on month view, all these websites are pretty poor on variable incomes. Quite simple to do if you understand how the PAYE system works.

Any chance of a copy of your caculator?