Christmas overtime leading to earning *less*?

CunningPlan44

My income has for some years now been very boring. I earn a regular monthly salary from one employer. Around once a year, the salary is adjusted, and for the 2020-21 year I also applied for an increased HMRC allowance for working from home (as advised by MSE!) - which meant my tax code was adjusted in the Summer of 2020. However, it just got rather more complicated - and I am concerned I am being taxed unfairly. To be clear: my salary lies above the personal income threshold where you start paying Basic Rate income tax, but well below the Higher Rate threshold.

For the first time in my entire working career, I had to work on Christmas Day 2020.

My company policy is that Christmas Day is paid at an overtime rate, and my December payslip reflects this. Unsurprisingly, I also had more deductions on this, so that while my December pay was £176.90 (gross) more than in November, my net pay was only £61.80 more than in November - this is down to higher deductions for Income Tax, NI, pension (which goes out as a % of pay) and student loan. My total deductions in November were £374.23, while in December they were £489.33. So far, so reasonable (if a little galling).

However, in my January payslip, despite my gross pay being back where it was in November, the deductions were higher - at £410.43. The only line that is different to November is the Income Tax - which accounts for the full £36.20 increase (compared to November). After discussing this with our payroll officer at work, it seems this is down to the fact income tax is calculated based on earnings in the Year To Date. The payroll officer seems to expect deductions to continue at this level for the rest of the tax year.

If for simplicity we assume that the Tax Year finishes at the end of March rather than a few days into April, this means in the 2021 months of this tax year, compared to the level in November, I should expect to pay 3 months of £36.20 additional income tax - which totals £108.60 more.
What seems unfair - and contrary to the way I thought Income Tax was supposed to work - is this amount is higher than the increase in net pay I received in December. Unless there has been a misunderstanding, and the deductions will reduce again for February and March, over the course of the entire tax year I am going to have been taxed so much more that it would have been better financially (to the tune of £46.80) to have not been paid the overtime. Surely this cannot be right?

The payroll officer has been in touch with the company that actually deals with the payroll, and they say there has been no error in calculations. However I do not understand how this can be.
I have a couple of bills I am attempting to pay off and had been expecting that my higher income in December could help with this - but it seems to have had the opposite effect. Can anybody help please?

Manxman_in_exile

I'm no PAYE expert but I think you are making the mistake of assuming that the tax youwill  pay for the remainder of this tax year will continue at the same higher rate as it is now.  I would have thought that as the effect of the "blip" of the higher pay in December gradually drops out of your cumulative year-to-date pay, your income tax deductions will fall correspondingly.

The point is that your total  tax paid in tax year 2020/21 should automatically correct itself through PAYE and you will be able to confirm this whan you get your P60.

If it's wrong, claim it back.

Thrugelmir

Over the course of the tax year, deductions for income tax will level out. You aren't being taxed unfairly it's just the way the system works. 

chrisbur

The only way to check your tax position and explain what is happening is if you give full and exact details.
From your payslip before the overtime and the payslip which included overtime....
Taxable gross
Tax paid
Pension paid
Student loan
Tax code and anything following eg 0 1 non cumulative cumulative X
Month or week number (or date paid if no number)
and most importantly
Taxable gross to date
Tax paid to date
You say "The only line that is different to November is the Income Tax - which accounts for the full £36.20 increase (compared to November). After discussing this with our payroll officer at work, it seems this is down to the fact income tax is calculated based on earnings in the Year To Date. The payroll officer seems to expect deductions to continue at this level for the rest of the tax year."
It is correct to say that your tax is calculated on earnings in the year to date but this would not result in a difference between the November and January tax figures (other than perhaps a 20p difference) under normal circumstances. If nothing else has been changed you would have to have been earning a great deal more earlier in the tax year (over £4000.00 a month) and been paying 40% tax then for this to have happened.  

CunningPlan44

Manxman_in_exile said:

I'm no PAYE expert but I think you are making the mistake of assuming that the tax youwill  pay for the remainder of this tax year will continue at the same higher rate as it is now.  I would have thought that as the effect of the "blip" of the higher pay in December gradually drops out of your cumulative year-to-date pay, your income tax deductions will fall correspondingly.

This is what I would have assumed - however my company's payroll officer has told me they expect my deductions to continue at the same level as in January until the end of the tax year; until my February payslip lands I have no certainty either way. I had initially assumed my temporarily-increased income would be dealt with entirely through the deductions in December, so the January payslip was a shock.

It's entirely possible that I am concerned about something that will self-correct over the next 2 paydays - but if so then the payroll officer and the company that deals with our payroll were either wrong or misunderstood one another. If they are correct, and my deductions continue to be £36.20 more than in November, then I believe February will be the month in which my total net YTD pay would be lower than if I had not been paid the overtime in the first place -  it's not like there's a lot of time left in the tax year to make those adjustments now...

CunningPlan44

Thrugelmir said:

Over the course of the tax year, deductions for income tax will level out. You aren't being taxed unfairly it's just the way the system works. 

If so, that means there are only 2 months left to make those adjustments and I'm already only around £25 up (net) compared to where I would have been without the overtime. Would you expect my deductions in Feb to be lower, or am I unlikely to see it properly adjusted until March, or even April? I'm trying to understand what my actual take-home income is likely to be in the 2(ish) months between now and the end of the tax year - I had expected it to be pretty simple but this is really confusing and makes it tricky to budget effectively.

chrisbur

If there have been no other changes to your pay details other than the extra pay for overtime then tax on that overtime would be 20%  So on an extra £176.90 would result in an extra £35.40 (give or take 20p) in tax on your normal tax figure and when your earnings returned to normal so would your tax.
The idea of a bit of extra pay affecting this and then being corrected over the following months is a misunderstanding of how PAYE works.  This sort of thing only happens when you cross over the tax bands, which does not appear to be the case here.

If you want an explanation you will have to give the figures that I asked for.  Then I or one of the others who follow this board and understand PAYE can explain exactly what is going on. 

jobbingmusician

You sound bright - can't you check the deductions yourself? The HMRC page at https://www.gov.uk/income-tax-rates makes it pretty easy to do this. You've got all the data you need on your payslip (presumably). Each month have a look at how much you have earned YTD and how much you've been taxed (for the avoidance of doubt, and for others reading this, you can work out what your tax code means on t'inernet too.) I assume (and it does seem from what you have written) that your company's tax year runs from April to March. What I would do is to look at your total pay to date in Dec and Jan. In Dec, divide this by 9 to give what the IR think is your [average] monthly pay and then multiply by 12 to give what the IR think is your annual pay. In Jan, divide your pay by 10.... ditto. Sorry, this is very basic stuff but I'm trying to write this in a way which is helpful to others too. Once you have an annual figure for each month (the annual figure will be different for the 2 months because of the overtime) you can work out what the tax and NI over the year should be on this figure. Then, in Dec you should have paid 9/12 (3/4) of this - do your tax and NI figures on your payslip agree? One question you will be asking yourself is whether the annual figure produced by the Dec pay tipped you over into 40% tax. And the same in Jan. If the figures DON'T agree, it's probably the time to publish them on here (after all, no-one on here knows who you are) for us to check. If they agree, you'll be able to predict what your figures for Feb and Mar are likely to be.

bartelbe

I use to get this problem all the time because I worked shifts, with lots of overtime for late, night shifts and Sunday working. This meant my pay each month was all over the place and the hopeless PAYE system couldn't cope. Even worse I had two jobs at one point and that caused the system to have a complete meltdown.

The result of all that was that for both the year I had two jobs and the year I had one job but very variable hours, I paid too much tax. The good news is I was refunded the over payment by the inland revenue in the following tax year. So if you have overpaid, you should get the money back.

eamon

Its the downside of normal earnings being close to a higher income tax bracket. A spike in overtime/bonus payments can make you question the worth of doing it. As already said PAYE is usually self correcting and will correct itself if sufficient time in that tax year failing that you should get a tax refund next tax year.

CunningPlan44

chrisbur said:

If you want an explanation you will have to give the figures that I asked for.  Then I or one of the others who follow this board and understand PAYE can explain exactly what is going on. 

I don't quite understand why they aren't in the thread already... I attempted to post them in the early hours of yesterday morning but it doesn't seem to have gone live. I was using another device at the time so will have to check it later.