PAYE... how do they actually work it out?

[Bob Fossil]

Morning all

I'm confused as to how they actually work PAYE out.

Now, I understand there are earnings thresholds, and any income over each threshold is taxed accordingly. What I don't understand is whether this is on a monthly basis or cumulatively over the year. I'll try to illustrate (bear with me):

For example, if you were to earn £45k in a year, then you would pay a small amount at 40%, some at 22% but NONE at 50%. However, if you were to earn £35k in a month, and then £10k over the remaining 11 months of the year would you pay the same tax? Or, do they look at your £35k in month one and assume that's what you get every month, thereby taxing you at 50% on a large chunk of your earnings?

Hope that makes sense, been up most of the night so feeling a bit

Thanks

BF

[Eric Mc]

Here's how £45,000 would be taxed (and NIed as well)

Income Tax (PAYE)

Gross Salary - £45,000
Less: Personal Tax allowance - £6,475
Taxable Salary - £38,525

1st £37,400 taxed @ 20% = £7,480.00 tax
Next £1,125 @ 40% = £450 tax

Total tax = £7,930.00

Employee's National Insurance

1st £5,720 @ 0% = £Nil
Next £38,168 @ 11% = £4,198.48
Next £1,112 @ 1% = £111.20

Total Employee's NI = £4,209.60

Total Tax and NI deducted for year = £12,139.60

Total Net Salary for Year = £32,860.40

For the monthly figures, simplyb divide by 12 to get -

Gross Salary - £3,750.00
Tax and NI deductions - £1,011.63

Net Monthly salary - £2,738.37

This means, of course, that the REAL peercentage value of all deductions from the salary comes to 27% approximately.


Obviously, if a person doesn't have the normal £6,475 tax allowance (which gives rise to the 647L PAYE tax code), then the tax calculation will be different. Tax codes have no effect on NI calculations.

[V8mate]

You've got it right, OP.

Let's say you start your job on April 5th.

At the end of Month 1, you'll have earned X - the PAYE system assumes you'll earn X*12 over the year.

At the end of Month 2, it'll assume you'll earn:

(Month 1 + Month 2)/2 * 12 over the year.

And so on.

[Eric Mc]

V8mate said:

You've got it right, OP.

Let's say you start your job on April 5th.

At the end of Month 1, you'll have earned X - the PAYE system assumes you'll earn X*12 over the year.

At the end of Month 2, it'll assume you'll earn:

(Month 1 + Month 2)/2 * 12 over the year.

And so on.

Correct - although there are special and different rules for calculating NI on Directors' salaries.

[V8mate]

Yep - was just demonstrating a 'regular' employee.