New job and tax

lookstraightahead

Savvy_Sue said:

Choirgrl said:

You should still have no tax deducted In August and September (because what you’ve earned in the year to that point will be under the cumulative tax allowance) and then tax will start to be deducted from October.

I'm not sure it works like that.

To keep it very simple, let's say gross pay in April, May, June and July is £1000 per month. No tax due.

In August, gross pay shoots up to £2000. HMRC assumes that's what you'll receive each month for the rest of the year, forecasts gross income for the year as £4000 + £16000. Tax due.

Now, here's the clever part. They check how much tax you've paid to date (none), and you start paying tax monthly EVEN THOUGH you haven't yet earned more than £12500, so that by the end of next March you've paid whats owed, and you pay roughly the same amount of tax each month.

That way HMRC gets money all through the tax year, and you don't get a nasty shock this autumn

In the same way, if you went back to £1000 per month, they would look at what you'd earned so far, how much tax you'd paid, and assume you'd get the £1000 for the rest of the tax year. You might get a refund, or just lower tax.

If your pay increases during the tax year, it means your net pay is smoothed out for the rest of the tax year, but it can mean your net pay goes down at the start of the new tax year, so watch out for that.

So over the tax year 23/24, my gross pay will be about £15,500. As I've paid no tax so far, I will pay 20% tax on £2930 spread out over august-March payments? But it will increase from April as I will be earning £18600 in the tax year 24/25. 

chrisbur

Savvy_Sue said:

Choirgrl said:

You should still have no tax deducted In August and September (because what you’ve earned in the year to that point will be under the cumulative tax allowance) and then tax will start to be deducted from October.

I'm not sure it works like that.

To keep it very simple, let's say gross pay in April, May, June and July is £1000 per month. No tax due.

In August, gross pay shoots up to £2000. HMRC assumes that's what you'll receive each month for the rest of the year, forecasts gross income for the year as £4000 + £16000. Tax due.

Now, here's the clever part. They check how much tax you've paid to date (none), and you start paying tax monthly EVEN THOUGH you haven't yet earned more than £12500, so that by the end of next March you've paid whats owed, and you pay roughly the same amount of tax each month.

That way HMRC gets money all through the tax year, and you don't get a nasty shock this autumn

In the same way, if you went back to £1000 per month, they would look at what you'd earned so far, how much tax you'd paid, and assume you'd get the £1000 for the rest of the tax year. You might get a refund, or just lower tax.

If your pay increases during the tax year, it means your net pay is smoothed out for the rest of the tax year, but it can mean your net pay goes down at the start of the new tax year, so watch out for that.

Sorry but this is a complete misunderstanding of how PAYE works.
First PAYE is based on a few simple calculations, those calculations are based solely on what you have earned so far this year and no assumptions regarding future pay are made.  HMRC do not except under some out of the ordinary circumstances take any action at all, the calculation of the tax due is all done by the payroll dept where you work (or more likely these days by the computer that your payroll dept uses)

Each payday the tax you owe on that payday based on earnings to date is calculated and from that is deducted the tax paid so far, the difference is the tax you pay that payday.
For example on month 4 payday 
Your earnings for the year so far (ie earnings up to and including month 40 are taken as the starting point.
Your various allowances are then applied to this figure for that point in the year so you get 4/12 of your allowance on which you pay no tax 4/12 of your allowance on which 20% tax is due, 4/12 of your 40% tax allowance, anything above that is 45%
This gives the figure for tax due to date.  From this is deducted the tax paid to date from month 3 to give tax due for you wages for month 4
In this way if your earnings fluctuate PAYE is continually adjusting the tax you pay as the year progresses.  
So you might for example get a bonus in May that pushes you into the 40% band as at that point you only get 2/12 of your allowances but as the year goes on and you get another 1/12 of your 40% tax allowance PAYE adjusts that 40% tax back to 20% tax so reducing your monthly tax until you are only paying 20% tax again

In this example
"To keep it very simple, let's say gross pay in April, May, June and July is £1000 per month. No tax due.

In August, gross pay shoots up to £2000. HMRC assumes that's what you'll receive each month for the rest of the year, forecasts gross income for the year as £4000 + £16000. Tax due."

To keep the maths simple I will assume a tax allowance of 1050 per month.
So April to July £1000 a month tax allowance £1050 a month so no tax as allowance always ahead of earnings eg momth 4 earnings £4000 allowance £4200
In August earnings up to £2000 so now year to date earnings are £6000 and allowance has now reached £5250 
So £6000 less £5250 is £750 tax is due on so £150 tax due
In Sept another £2000 so £8000 to date and allowance now £6300 so tax due on £1700 which is £340 less tax paid to date as at last month of £150 gives tax due this month of £190
Lets say in October it goes back to £1000
Now have year to date of £9000 and allowance of £7350 so tax due on £1650 which is £330
Tax to date last month was £340 but tax due now is £330 so this month there is a tax rebate of £10

Etc

Tax allowance for the OP will be 12579 (slightly rounded ) so 1048.25 a month
So month 1 1048.25 month 2  2096.50 month 3 3144.75 etc
As choirgrl correctly pointed out earlier taxable pay to date will be less than allowances up to month 6 So month 7 taxable pay will be greater than tax allowance so tax will start to be deducted (possibly a bit lower than following months as still a bit of unused tax allowance from past months). From then on tax will be just about the same each month, may just vary 20p occasionally.

lookstraightahead

Thank you so much Chrisbur - I think I need to sit down with a coffee and read it through again 😅