When the payslip arrives at the same time each month the majority of us tear it open to see if a miracle has occurred and the bosses have kindly decided to overpay this month. When you realise that this is not the case and it’s the same as every other month it will go into the drawer with all the others never to be considered again. The assumption is made that the tax payments are dealt with and as such will be correct. A few simple steps however can confirm whether this is the case or not.
Each individual is entitled to a personal allowance each year. This allowance is the amount of income, currently £6,475, you can receive without having to pay any tax, and for taxable income of up to £37,400, the tax rate is currently 20%.
Therefore, 20% of your annual income after the deduction of your allowance will be your tax liability, e.g. annual income of £16,000 – £6,475 = £9,525 x 20% = £1,905 (your tax liability for the year).
The PAYE scheme (pay as you earn), was introduced to spread the tax charge monthly so that no further tax liability is due at the end of the tax year (as it would be with other types of income). This system means that the majority need not bother with personal tax returns as the correct tax is calculated for you through PAYE.
HMRC provide your employer with a tax code based on your details regarding income and employment, this code can be found on your payslip.
For the basic rate taxpayer with a standard personal allowance you are likely to have the code 647L. They take the basic personal allowance and divide by 10 – do not ask why, it is an anachronism. To summarize, if your yearly allowance is £6,475 then a month’s proportion of this would be £6,475/12 = £539.58. If you earn £1,000 a month gross, you deduct your month’s worth of allowance; multiply this by the 20% tax rate and that should be the tax figure showing on your payslip.
Should you receive a bonus, extra pay or overtime the allowance will remain the same and you will be taxed on anything above this.
Your tax code should correspond to your allowance e.g. £6,475 is 647L. Next year with the £1,000 increase in allowance it will be £7,475 code 747L. The ‘L’ in your tax code indicates that you are entitled to the personal allowance. Allowances are individual to each person and as such if yours varies from the standard £6,475 you can still use the basis above to calculate your payments by multiplying the number in your tax code by ten and inserting your specific allowance into the example, where the standard personal allowance would be, as long as you are under the £37,400 basic tax rate band. Those earning above the basic rate threshold will be taxed 20% to £37,400 and 40% on anything above up to the higher rate of £150,000.
Although a bit more time consuming than just putting your slip in the drawer, once you have checked it the first time, you can be sure that your other slips will be correct just by checking they are similar (maybe a couple of pennies different) figures. It is also useful to know that you are not under, or over paying your tax therefore avoiding any future problems.
Please note these calculations are based on the basic rate tax payer for the financial year 2010/11. Work place benefits like private medical, company car benefit and higher earnings will all change these percentages and allowances. Should you be concerned that your code may be incorrect speak to your employer or HMRC to resolve the issue as soon as you are aware of a potential problem. Our website contains a simple UK payslip calculator if mental arithmetic is not your forté. It also calculates the national insurances amount for you.
Tags: Payroll, Payroll & Benefits, UK International payroll, UK PAYE, UK Payslip
