Can someone explain PAYE to me then?

I understand about my tax free bits and bobs over a year, and it makes sense that they’d apply that over the year

Say, for example that I earned £40k a year I would assume they split my tax free allowance over the 12 months and I get paid the same amount each of the 12 months, I can get my head around that.

If I then got a payrise or a couple of bonuses throughout the year how do they work out how much tax to take out then?

If someone has used all the tax free allowance and the 20% bracket, nope, my brain has melted again. bugger it.

Isn’t it done retrospectively ? i.e. the tax you’re paying this year is actually on what you earned last year ?
And then they adjust your tax code every year to correct any discrepancy ?
Maybe

Mmmm, that’s not really paying as you earn is it!

Couple of nice project based bonuses this year that definitely won’t be happening this year make that prospect worrying!

That’s true, that can’t be right.
I should know this …………
Help !

As far as I know if you get a bonus it’ll just go on your paycheck as normal and the tax adjusted as required. Your taxcode specifies how much tax free allowance you get and takes into account any benefits that are taxable, like a company car etc. I assume then if you get a bonus, say half way through the year that takes you up a tax bracket then you’ll pay more tax on the earnings from then till the end of the year?

Self assessment is done retrospectively so for that you are declaring and paying last year’s tax, PAYE is as you earn so is based on the money you’ve earned this month. You have a tax code which indicates to the employer what deductions to make. If you’re income varies those deductions might remain constant until you have a new tax code as the employer doesn’t know all your tax affairs (you might have a second job or a self employed income, be a landlord etc so they only make deductions in relation to the instruction HMRC gives them), so a pay rise can result in you making over or under payments until a new tax code is issued and you either get a rebate or a bill or have your tax code adjust in such a way is it smooths out the discrepancy.

Also your tax free allowance is a constant, its not a percentage of your salary so a salary variance doesn’t mean your allowance changes so a salary variance shouldn’t always mean under or over payments, they’re more likely to occur if you change jobs, have breaks in service or have more than one income source.

It’s cumulative over the tax year, so month 1 is just whatever you earn x12 and does the maths. Month 2 is month 1 + 2 times 12/2, month 3 is 1+2+3 times 12/3, etc.

So a big bonus in April will get royally shafted as you’ll be taxed as if you earn that much every month, but then you’ll pay lower tax for the next 11 months to make up for it as it averages out, a big bonus in March will get taxed the right ammount (as the tax year ends apirl 6th).

IIRC though NI contributions are done monthly, so you never get that back, but they drop off to almost nothing over a certain earning anyway so a big bonus won’t attract much NI.

Obviously they have base tax brackets that are set by your projected earnings. If you recieve a massive bonus one month that maybe goes over that tax bracket they would tax you that month accordingly. A lot of people will be on 1000L which is up to £10000 tax free allowance which is spread across 12 months. The remainder of your pay is then taxed at a percentage based upon your total projected income for the year. If you earn £25k the first £10k of that is tax free spread over 12 months. The last £15k is taxed at the appropriate percentage over 12 months.

Whole thing is a total nightmare. Was going through the Wife’s stuff last night as her car allowance figure was too high. Found out the P11D was wrong as her employer had got the dates wrong for a company car she wrote off, so had declared her as having two cars for ages, when one was actually scrapped after 3 days (brand new as well)!

<edited due to stupidity>

Whole thing is a total nightmare.

Hah.. speak to someone from the US 🙂

Whole thing is a total nightmare. Was going through the Wife’s stuff last night as her car allowance figure was too high. Found out the P11D was wrong as her employer had got the dates wrong for a company car she wrote off, so had declared her as having two cars for ages

Well, that’s not really HMRCs fault…

How it works is:

employer(s) submit P14s for your last years work. this contains pay and tax details. at the start of the next year PAYE estimates what you will earn for the coming year using that information. you get given a tax code that taxes you month on month. if you get paid more or less, or receive employment benefits etc, as long as you don’t go into a new tax band you’ll get taxed the same %age of your pay every month.

at the end of the year PAYE perform a reconciliation to understand if you have been paid the amount expected, and if you have paid the right amount of tax. The vast majority of people, 95% i think, fall into this bracket.

if you have paid too much you get a cheque, if you haven’t paid enough it’s either coded into next years tax code, so you pay it back over the next year, or if it’s loads you’ll get a Voluntary Payment Letter, saying ‘give us money’

Well, that’s how it used to work. Real Time Information now recalculates your tax code every month, as your employer now has to submit details about your pay and tax every month. Effectively removing the need for the final reconciliation.

guess what computer system i work on 🙂