How is PAYE Tax Calculated ?

PAYE is an efficient, cheap and straight forward way of HMRC collecting income tax from employees (and pensioners) and, when it works properly, it is easy to monitor and check!

Basically, then, almost everybody in the UK – men, women and even children are entitled to an annual personal tax allowance. This being the total amount of money they can earn free of tax.

In the UK, every employee or pensioner paid under the PAYE ( aka Pay As You Earn ) scheme is allocated a tax code by HMRC  ( HM Revenue & Customs ) . HMRC issues a new ( and most of the time the same tax code ) each tax year. The tax codes are based on numbers determined by the current Chancellor of the Exchequer. The assigned tax codes determine how much tax the employer (or pension provider) deducts from the employee or pensioner.

PAYE Calculations

In the 2014/15 tax year (starting at April 6th 2014 to April 5th 2015), the ‘standard’ personal allowance is to be £10,000 . That means that somebody earning £24,000 per annum will be due to pay £2,800 in tax .

The calculation is as follows £24,000 – £10,000 = £14,000 @ 20% = £2800.

Although the ‘first’ £10,000 of earnings are tax-free, there is somewhat of a catch. if an employee is earning £2,000 per month , it does not mean he doesn’t pay any tax in the first five months of the tax year. The PAYE system is designed so that the £10,000 allowance is spread equally throughout the tax year.

That means that each month £833 of the £10,000 allowance is available tax free. This results in the tax liability of £2,800 being paid at the rate of  £233.33 per month ( £2,000 – £833 = £1,167 @ 20% = £233.33 ).

Easy?! Simple?! Straight Forward?! YES, at first sight but, of course, life in general – and personal taxation matters in particular – are always liable to errors, omissions, mistakes or, as HMRC have regularly been guilty of, cock-ups!!!

At The Tax Back Service Company we work on a no-refund no-fee basis. This means that if you fill the relevant form here and you are not entitled to a tax refund, you will not have to pay a penny!

So don’t hesitate and contact us today to ensure HMRC haven’t made any mistakes with your tax calculations !