Salaried but tax fluctuates wildly

Cristoff1903

Hope you can point me in right direction

i am salaried earning 44.5k
i get a bonus paid in may ( was 10% normally but will be 5% this year) plus 2 x sundry payments in may and November of around £160 each
i pay 7% pension contribution 

my issue is my net pay for first half of year is significantly more than second half of year. 

It’s roughly £25xx on a ‘flat month’ till about October-ish then drops to £23xx
Our resident wages expert says they are readjusting your tax as I’ve underpaid 1st half of year but it’s a pig to budget for. It’s been this way for probably the last 4/5 years. I don’t remember it being like this before that. 

My question is, is there any point ringing the tax office to protest? As I am salaried my earnings are predictable except for the bonus which is the only real curve ball. Am I expecting too much to be paid a fairly consistent net wage?

thanks in advance

bargainbetty

You are in the first month of a new tax year. Your allowances are back to zero, so your tax this month will be calculated on a Month 1 basis. Your second month, May, will include a bonus, which then skews your average earnings for a couple of months and means your cumulative earnings are disproportionate in the early part of the year. You also get a sundry payment in November, which will throw things off again. 

The calculators don't know what you are earning every month until you get it. They adjust your salary based on your actual earnings and the tax due on it. You can call and protest, but it won't make a difference at all. 

Sadly, unless you get all your bonuses in Month 12, this will continue to happen in some shape or form. 

p00hsticks

Your first step is probably to log onto your personal tax account, check what tax code you have been assigned, how they have arrived at it and if it agrees with what you think it should be....

https://www.gov.uk/personal-tax-account

If you are paid a regular salary, HMRC has all the correct info to calculate your tax code correctly at the start of the year and your employer applies it then you should expect a simialr net pay each month, although a one-off bonus in May will skew the figures a bit.

chrisbur

Only limited details but what appears to be happening is that your bonus early in the tax year is pushing you into the 40% tax band ( earnings with bonus at month 2 appear to be aprox 12K and allowance before 40% tax due is just over 8K assuming standard tax code.)Your earnings then go back to normal so you have some 20% tax band unused each month so this reduces your tax each month as some of that 40% tax is converted to 20% tax.  This goes on each month until all of the 40% tax you have paid has been converted to 20% tax so your tax for the following months has nothing to reduce it so appears to be higher but in fact it is the normal tax it was the early part of the year when PAYE was adjusting 40% tax to 20% tax that was really lower than normal.  By normal I mean the tax someone would pay on those earnings who had not gone into 40% tax band.
If you want this checking you need to advise taxable pay to date and tax paid to date along with tax code and date of payment or month number on the bonus month and the same details for one of the months when your tax appears to be higher.

If this is what is causing it then no point going to HMRC as this is exactly what PAYE is designed to do.

Mirkou

I am spending a lot of money on taxes. I never miss an opportunity to cut a part of that money

Cristoff1903

Thanks for the replies. I’m decent at maths but seem to have a mental block when it comes to taxes for some reason. 

The bit I don’t get is if it assumes I’m a high earner at the start of tax year due to bonus then my logical brain says my tax would be higher in the first half of year until it realises I’m not earning as much as it thinks. Then adjusts this, therefore I pay less tax latter part of year. 

What’s actually happening is the total opposite of this. Your replies seem to suggest that it’s doing nothing untowards which is somewhat reassuring I guess. 

Thank you all for taking your time 

p00hsticks

Cristoff1903 said:

The bit I don’t get is if it assumes I’m a high earner at the start of tax year due to bonus then my logical brain says my tax would be higher in the first half of year until it realises I’m not earning as much as it thinks. Then adjusts this, therefore I pay less tax latter part of year. 

What’s actually happening is the total opposite of this. Your replies seem to suggest that it’s doing nothing untowards which is somewhat reassuring I guess. 

Thank you all for taking your time 

From what chrisbur is saying - You overpay in the month you get your bonus (May) because HMRC thinks you will be earning that all year. Then when your salary drops back down the following month you will get effectively some of that overpayment back, by  paying less tax . This 'refund' will continue each month until you get all of the overpayment back - which sounds as if it takes until October. After that you'll be on the 'correct' tax each month unti lthe end of the year.

chrisbur

For some reason this post has appeared twice so have deleted one of them.

chrisbur

The first thing to understand is that their is no brain behind PAYE.  It does not assume anything there are just a few mathematical rules that are applied in order to work out how much tax you owe at the time you are paid.  Each month you get an allowance for no tax and another for 20% tax then go to 40% tax.  For month 1 you get 1/12 of each figure for month 2 you gat 2/12 then 3/12 etc.  These allowances are set against your earnings to date and tax owed to date is worked out.  From that is deducted tax paid up to your last payday and that leaves tax to be paid for that month.
If you would like to give actual figures I can show the maths that are used to calculate your tax but in case you prefer not to then I give below some figures that hopefully will show what is happening.  Some figures rounded a bit to simplify it.
I have assumed monthly pay of 3500 with bonus of 4500 at month 2 Free pay allowance of 1048 a month and 20% band of 2452 a month.

Month 1
Gross to date 3500
Free pay 1048 No 40% tax is due as earnings all fall below the 40% tax band for month 1
Tax due on 2452 all at 20% is 490

Month 2
Gross to date 11500  ( 2*3500 plus bonus 4500 )
Free pay 2096
20% allowance 6304
Tax due 20% of 6304 and 40% of 3100 is 2501
Less 490 from last month already paid tax due this month 2011

Month 3 Gross to date 15000
Free pay 3144
20% tax allowance 9456
Tax due 20% of 9456 and 40% of 2400 is 2851
Less 2501 from last month already paid tax due is 350

Month 4 
Gross to date 18500 
Free pay 4192
20% tax allowance 12608
Tax due 20% of 12608 and 40% of 1700 is 3201
Less 2851 from last month already paid tax due is 350

This continues with the pattern of the amount due at 40% going down each month.
This affectively gives you a tax reduction for each month.
Eventually you run out of 40% tax to be reduced so go back to the tax figure you had for month 1 which was 490
Your tax has not gone up when this happens it was being reduced month by month as the 40% tax was converted to 20% tax.

chrisbur

p00hsticks said:

Cristoff1903 said:

The bit I don’t get is if it assumes I’m a high earner at the start of tax year due to bonus then my logical brain says my tax would be higher in the first half of year until it realises I’m not earning as much as it thinks. Then adjusts this, therefore I pay less tax latter part of year. 

What’s actually happening is the total opposite of this. Your replies seem to suggest that it’s doing nothing untowards which is somewhat reassuring I guess. 

Thank you all for taking your time 

From what chrisbur is saying - You overpay in the month you get your bonus (May) because HMRC thinks you will be earning that all year. Then when your salary drops back down the following month you will get effectively some of that overpayment back, by  paying less tax . This 'refund' will continue each month until you get all of the overpayment back - which sounds as if it takes until October. After that you'll be on the 'correct' tax each month unti lthe end of the year.

That is the effect of it but HMRC have nothing to do with it and no-one makes any assumptions.  It is all based on the mathematics of PAYE and they are in a couple of booklets that in one form or another pre-date the use of computers for payroll.
Table A here
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/783933/Tables_A_Pay_adjustment.pdf
Tables B to D here
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/879016/Tax-Tables-B-D_04-20_.pdf

Grumpy_chap

They are excellent posts by @chrisbur to explain how PAYE works through the year.  I never seen it set out so clearly before.