Newbie PAYE tax questions

whitelightning

Hi all, I've just come across this forum and would like to say it's brilliant with some good advice and responses.

I'm currently employed full time and pay my taxes through PAYE. I've got a few questions about PAYE and more importantly, want to know what's the chances of me paying too much tax.

1) How does the tax office work out the tax I should pay each month? I've heard various rumours from it's 100% accurate and unless your conditions change during the tax year you can't over pay income tax, to the tax office using assumptions from the start of the tax year and make adjustments as the months pass. Any clarification on this?

Just to explain my situation a bit....

2a) In 04-05 I was on a basic salary of £23k therefore I'm shouldn't be on the high rate tax. In Apr 04 I was paid £1900 pre-tax which is fine but for the rest of the year my monthly salary has varied greatly (from £1900 to £4000) due to overtime, taking my earnings for the tax year to just a bit over £37k which I guess takes me to the 40% band.

2b) In Apr 05 I had a pay rise taking my base salary to £24.5k. My Apr 05 pay was £3800. From my annual salary I should be on 22% but my Apr 05 takings I should be on 40%. I don't know how much I will earn by the end of the current tax year but how will the tax office handle this? Would they have assumed I should be taxed 40% since I ended in the band last tax year or do they look at my base salary?

I can see how PAYE is fine for them who earn a stable-ish salary but for people who's salary can vary I can't see it being an easy job.

Well, the most important question is what are the chances of me overpaying income tax and how do I get this checked out?

Thanks in advance.

telly-addict

PAYE operates on a cumulative basis. Your PAYE code is based on the personal allowance (PA) which is the amount you can receive before paying tax. Reducing this will be any benefits in kind (BIK) such as a company car or private medical insurance. If you pay any professional subscriptions then they are added to your PA.

Generally these benefits in kind are based on the figures shown in the previous year's form P11D which is produced by your employer and,as such, should be reasonably accurate year on year. Where you can have the problem is when you get a new benefit part way through the year and it is not reflected in your code and you end up having a liability. The way to overcome this is to ensure you contact the Revenue to have your code updated if you start to get BIKs.

The IR allocate 1/12 of your personal allowance (as adjusted for benefits), 10% and 22% tax bands to your salary each month. If you are a 40% tax payer for one month then you will pay the extra for that month. It operates cumulatively so once you are over the higher rate threshold for that year, there should be some 40% tax coming out each month. The PAYE system does work fairly well. But, if you have had some high months then it is worth checking the overall position at the end of the year, especially if you have benefits in kind too.

Use your P60 which shows your taxable income (relevant if you pay pension contributions from your salary) and your P11D which will show any benefits in kind. From salary plus benefits, deduct your personal allowance ( 4745 in 04/05, 4895 for 05/06). Now you have your taxable income. The first 2020 is taxable at 10% = £202, call this A. The next 29,380 is taxable at 22% = 6463.6, B. Over this is taxable at 40% = C. Compare the figure on your P60 as PAYE to your answer (A+B+C) to give you an indication whether you are over or under.

Don't forget that if your total income exceeds £31,400, you will be liable to pay 40% tax on any bank interest or other income, 32.5% on dividends.

For info, 2005/06 bands are 0-2090 @10%, 2091 - 32,400 22%, higher rate above 32,400.

Murtle

if you are working for yourself, see if you can get on one of the inland revenue PAYE courses. They are free and will explain to you really simply how to work out the correct amount each month.

You will have a basic tax allowance, this is your tax code. Based on that you work out how much tax you pay monthly. It is cumulative, so if you are paid more one month you pay more tax that month, if the following month you are paid under then you don't pay as much tax. NI is not cumulative, you pay based on what you earn in that month!

Hope that makes sense?!

YorkshireBoy

telly-addict wrote:

Don't forget that if your total taxable income exceeds £31,400, you will be liable to pay 40% tax on any bank interest or other income, 32.5% on dividends.

For info, 2005/06 bands are 0-2090 @10%, 2091 - 32,400 22%, higher rate above 32,400.

Sorry to be pedantic, but done for reasons of clarity for the OP.