Higher Rate Taxpayer

mr_fishbulb

LisaContractorUmbrella wrote: »

The PAYE system works on the assumption that your earnings for one pay period will be the same for the whole financial year and tax is then applied accordingly

Which is how people like me on varying overtime and possible bonus towards the end of the tax year, end up in a mess

Doh

LisaContractorUmbrella wrote: »

The PAYE system works on the assumption that your earnings for one pay period will be the same for the whole financial year and tax is then applied accordingly e.g. if your earnings for month 1 are £5000 the system will assume that your earnings for the year will be £60000 (£5000 x 12) and you will pay income tax accordingly.

HTH

i have been in this scenario a couple of times lately were i've busted a guy doing loadsa over time one month and paying the effectively higher rate tax, though at the end of the year i won't reach the higher rate tax bracket... i assume in this case i will be in for a refund?

chrisbur

LisaContractorUmbrella wrote: »

The PAYE system works on the assumption that your earnings for one pay period will be the same for the whole financial year and tax is then applied accordingly e.g. if your earnings for month 1 are £5000 the system will assume that your earnings for the year will be £60000 (£5000 x 12) and you will pay income tax accordingly.

HTH

This is only true if you are on a Week1/Month1 code for example if you are on an emergency tax code.
If you are on a cumulative code as most people are your tax deductions are worked out each month on the basis of what you owe up to that month. So to take the above example if after the £5000 in month 1 you then only recieved £3000 in month 2, your tax would be worked out on £8000 so far and the tax taken in month 1 is deducted from the tax due on the £8000 and that is your tax for month 2. If say you then had no taxable income for month 3 then your total income so far is still £8000 the tax is worked out on this for month 3 and as you are now getting another months tax allowance the tax due is less than you paid in month 2 so you get a tax rebate. This continues on each month with your tax being worked on your actual income each month and what you have already paid being taken off to leave the tax due for that month. You eventually get to month 12 when your total tax due is worked out and what has been paid to month 11 is deducted from that and that is your last month's tax.
In this way as you income changes up or down your tax is being adjusted to be correct month by month.
If for example you had a large payment early in the year which caused you to pay tax at 40% and then returned to a lower payment which meant that no 40% would be due that year, then each month your tax would be adjusted with some of that 40% now being assesed at 22% (20% next year) untill eventualy all the 40% was cancelled out.

In this way most people end the tax year having paid the correct amount of tax however mutch their income changed.

chrisbur

Doh wrote: »

i have been in this scenario a couple of times lately were i've busted a guy doing loadsa over time one month and paying the effectively higher rate tax, though at the end of the year i won't reach the higher rate tax bracket... i assume in this case i will be in for a refund?

If you are on a cumulative code your tax will correct itself month by month as explained above.