Dumb PAYE question

AdamBrunt

... which I really, by now, should know the answer to.

Under PAYE if you have a one off month where your salary puts you into the next tax bracket but your annual salary will still be below the next threshold, do you have to claim for overpaid tax or does the system handle it automatically by, say, increasing your tax code ?

Strummer22

Your tax code stays the same but the tax deducted in subsequent months is reduced as the system "realises" that your pay increase wasn't permanent.

Any discrepancy at the end of the tax year is accounted for with a revised PAYE code for the following tax year. 

vacheron

The PAYE system will adapt so you will have paid the correct tax at the end of the year... unless that unexpected jump happens in March which leaves no more months for adjustment, in which case any adjustment will be paid or refunded over the next tax year (usually via a tax code change).

monkey-fingers

Just as an aside, the only dumb question is the one you never asked.

chrisbur

vacheron said:

The PAYE system will adapt so you will have paid the correct tax at the end of the year... unless that unexpected jump happens in March which leaves no more months for adjustment, in which case any adjustment will be paid or refunded over the next tax year (usually via a tax code change).

If the extra pay in March (ie last tax period) causes tax to be deducted at a higher rate then that means the total tax for the year has gone into the higher tax rate so there would not need to be any adjustment.
The only exception would be if the employee was on a non cumulative (week 1/ month 1 ) tax code at the year end or during the year.  Only a cumulative tax code corrects for an occasional move into a higher tax band.
If during the year the employee was on a non cumulative tax code and paid an occasional amount of higher rate tax then if later the tax code was adjusted to cumulative then any overtaxed amount would be adjusted in the next payday.  So provided the employee is on the correct cumulative tax code, at or by the year end as most are, then tax will be correct.

vacheron

chrisbur said:

vacheron said:

The PAYE system will adapt so you will have paid the correct tax at the end of the year... unless that unexpected jump happens in March which leaves no more months for adjustment, in which case any adjustment will be paid or refunded over the next tax year (usually via a tax code change).

If the extra pay in March (ie last tax period) causes tax to be deducted at a higher rate then that means the total tax for the year has gone into the higher tax rate so there would not need to be any adjustment.
The only exception would be if the employee was on a non cumulative (week 1/ month 1 ) tax code at the year end or during the year.  Only a cumulative tax code corrects for an occasional move into a higher tax band.
If during the year the employee was on a non cumulative tax code and paid an occasional amount of higher rate tax then if later the tax code was adjusted to cumulative then any overtaxed amount would be adjusted in the next payday.  So provided the employee is on the correct cumulative tax code, at or by the year end as most are, then tax will be correct.

You are quite right of course. No idea why my brain decided to tell me that in period 12 when you know the total yearly income,and the cumulative tax paid up to and including period11, that a payroll system would not be able to calculate the correct amount of tax in the final month!  🤦‍♂️

Dugal

Like the OP this month I will receive a small, one off, UFPLS with my pension which takes the annual equivalent to £50666 (£4222.20 in the month).  The tax taken seems to be more than I calculate at 20%, so I presume there is some 40% tax, though I cannot get to agreement with the tax taken.  My tax code is 495LX, so based on comments above I will carry forward overpaid tax to the year end?  I do complete self assessment so it should sort itself out in the end.

molerat

Dugal said:

Like the OP this month I will receive a small, one off, UFPLS with my pension which takes the annual equivalent to £50666 (£4222.20 in the month).  The tax taken seems to be more than I calculate at 20%, so I presume there is some 40% tax, though I cannot get to agreement with the tax taken.  My tax code is 495LX, so based on comments above I will carry forward overpaid tax to the year end?  I do complete self assessment so it should sort itself out in the end.

£894.86 tax ?  A gross payment of £4222.20 taxable on a code of 495LX gives £413.25 tax free, £3142 at 20% and £666 at 40%.

With an X suffix each payment is taken in isolation so tax will not automatically be refunded in year by the PAYE system.