PAYE Tax Calculation

Joey122

Hi All,

I m really struggling to understand this PAYE calculation.

If you earn X a year and then mid year (December) get a pay rise, then do you need to reclaim any tax from the tax man?

Put another way : Does PAYE account for changes in salary mid year?

Any ideas?

efallai

I work for the NHS and get an annual increment in June every year - I earn well under the 40% tax threshold (!) but when I have my increase of just under £1000 a year in my salary my tax increases by about £20 I think...

jem16

Joey122 wrote: »

Hi All,

I m really struggling to understand this PAYE calculation.

If you earn X a year and then mid year (December) get a pay rise, then do you need to reclaim any tax from the tax man?

Why would you reclaim tax if you are earning more? You will be paying more tax.

Put another way : Does PAYE account for changes in salary mid year?

Any ideas?

Yes it does.

Joey122

Suppose you earn 40K a year you will be taxed at 22%.

Now imagine that in December you get a pay rise move up to 45K so for Dec -> April you get paid slightly more.

Your average over the financial year would have been about 42k which is just the 22% level whereas if you tax each month individually then you pay 22% for the first 9 months but 40% for the remainder.

Do you see what I mean here?

This is potentially quite serious I would think

Feel free to ask if this does not make sense, but the PAYE system cannot take this into account because it WRONGLY assumes you will be gettiung the same salary for the rest of the year.

More specifically this will affect people each year who are pushed from the 22% bracket the 40%.

CLAPTON

no it works like this.. it doesnot work on a monthly basis but an accumulative basis .......so ......

each and every month the payroll system takes your total earnings to date (since april 6th ) and works out the tax due ... then it takes the total tax already deducted (i.e from last months pay) and then says thats how much tax you owe...

so it automatically accounts for increases in salary or indeed decreases in salary.

Joey122

Clapton - Are you sure?

I have seen mid month bonuses being taxed at 40% even though the earner is at 22% .

Apparently this is done because the tax man expects you to continue earning this bonus and end of month salary every month

So are you sure about the above?

chrisbur

Joey122 wrote: »

Suppose you earn 40K a year you will be taxed at 22%.

Now imagine that in December you get a pay rise move up to 45K so for Dec -> April you get paid slightly more.

Your average over the financial year would have been about 42k which is just the 22% level whereas if you tax each month individually then you pay 22% for the first 9 months but 40% for the remainder.

Do you see what I mean here?

This is potentially quite serious I would think

Feel free to ask if this does not make sense, but the PAYE system cannot take this into account because it WRONGLY assumes you will be gettiung the same salary for the rest of the year.

More specifically this will affect people each year who are pushed from the 22% bracket the 40%.

No assumptions are made when tax is calculated on a cumulative code.
For the first month your month's salary is taken and from this is deducted one twelth of your tax allowance to get a taxable pay figure. Tax due on this is worked out using one twelth of the 10% band then one twelth of the 22% band and if it goes over this then 40% is taken on the amount it is over by.
This is then your first month's tax figure.
For the second month your two month's salary is taken and from this is deducted two twelths of your tax allowance to get a taxable pay figure as at month two. Tax due on this is worked out using two twelths of the 10% band then two twelths of the 22% band and if it goes over this then 40% of the amount it is over by.
This then gives your tax due for the first two months, from this is deducted the tax you paid for the firs month and this gives the tax you pay for month 2.
This continues for each month so in month 3 your total tax due to month 3 is worked out and tax already paid to month 2 is deducted and that gives your tax for month 3.
Finaly you get to month 12 when the tax you owe for the whole year is workd out and from that is deducted the tax you paid to month 11 and that leaves the tax to be paid in month 12.

jem16

Joey122 wrote: »

Suppose you earn 40K a year you will be taxed at 22%.

It would be 40%. Anything over £39,825 (assuming normal tax code of 522L) is taxed at 40%. Although if you are talking about next tax year then yes it's 22%.

Now imagine that in December you get a pay rise move up to 45K so for Dec -> April you get paid slightly more.

Your average over the financial year would have been about 42k which is just the 22% level whereas if you tax each month individually then you pay 22% for the first 9 months but 40% for the remainder.

You would probably pay slightly more in December but then it would adjust in January - March. By the end of the tax year you would be paying the correct amount as it looks at the cumulative total.

chrisbur

Joey122 wrote: »

Clapton - Are you sure?

I have seen mid month bonuses being taxed at 40% even though the earner is at 22% .

Apparently this is done because the tax man expects you to continue earning this bonus and end of month salary every month

So are you sure about the above?

There are two posiibilities here.

One the bonus may be early in the tax year, say month two. Then the sum of the earnings for the two months may be higher than two twelths of the 40% band starting point. If this is the case then some tax will be deducted at 40%. But then each month some of that 40% tax will be converted to 22% tax, (and assuming that the whole year's income is below the 40% threshold), before the tax year end all the 40% tax will be converted to 22% tax.

Two they may have been on a month 1 tax code, for example the emergency code. In this case the tax deducted may be wrong but will be corrected when they get a proper cumulative code.

snowman2_2

PAYE works it all out automatically regardless of differing amounts each month although if there are big changes it may take a couple of months to straighten out. PAYE is a good simple system, it is all the allowances and tax breaks that complicate life.

GARDINER

Clapton is correct - the tax tables automatically account for any increases or decreases in salary as long as your code number is not on a week or month one basis all year, in which case you would need to have the tax deductions checked at the year end.