Whether you’re getting your payslip for the first time or you have been getting it for years. It’s important to understand what is PAYE, how it is calculated, and what affects deductions on your payslip.
There are different tax codes on your payslip that determine the tax you owe to HMRC. What those tax codes indicate, what to do if your tax code is wrong, in this short blog, we’ll discuss them all.
What is PAYE?
Introduced in 1944, PAYE (Pay as you earn) is the system to deduct income tax and national insurance from your income before you receive it. The PAYE system is handled by your employer as part of your payroll. This money is directly transferred to HMRC before it comes into your account. Other deductions like student loan repayments and pension contributions can also be done through PAYE.
The other method to pay your income tax is through completing a self-assessment tax return to pay your tax annually or twice a year.
Learn more about PAYE and Payroll registration.
Curious to know how PAYE is calculated. Let’s see how?
It is calculated based on your earnings excluding your personal allowance. Currently, your personal allowance is £12,570 (2021/22) that is the tax-free amount of your income in a tax year. Above this threshold, you are charged 20% (for basic rate taxpayer), 40% (higher rate taxpayer), and 45% (additional rate taxpayer). The rate whereby you are charged depends on your income.
This rate is applied everywhere in the UK except Scotland. Your personal allowance will decreases by £1 for every £2 for income exceeding £100,000.
Key Takeaway: If you came to know that you have overpaid tax at the year’s end, you can ask for a refund from HMRC. If it’s below your tax liability, you will be asked to pay your remaining tax amount.
After knowing ‘ What is PAYE’ let’s move towards ‘What Affects Deductions on your Payslip’
What Affects Deductions On my Payslip?
Many people keep on overpaying their taxes for years, or sometimes they underpay their taxes due to the fear of overpayments. PAYE collects the right amount of tax through a tax code or a series of tax codes provided to your employer to work out your due tax.
Sometimes as an employee, you might have incorrect tax codes that create tax issues. In such a case, you are responsible to ask HMRC for the correction to avoid tax issues before the end of the year. You can find your tax code on your payslip.
You can go through the tax code to check whether it suits your circumstance or not. Here is the list:
- C: your income is taxed as per the Welsh rate of income tax
- K: it implies that you haven’t paid any tax on the income that is above the standard personal allowance
- L: means a standard tax-free personal allowance is entitled to you
- M: (marriage allowance) you have collected 10% Personal allowance of your spouse
- N: (marriage allowance) it shows that you have shared 10% of your personal allowance with your spouse
- S: you’re taxed (income or pension) at the Scottish income tax rates
- T: there are other calculations in your tax code to work out your personal allowance
- OT: you have used your personal allowance, or you’re doing a new job and you don’t contain a P45 form, or you haven’t provided the details to your new employer whereby your tax code is assigned
- BR: you are taxed ( income or pension) at the basic rate (mostly this rate applies if you have two or more jobs or pensions)
- DO: you have to pay tax at a higher rate
- NT: It means that you are not paying income tax on this income
- W1 or M1: W1 refers to week 1 and M1 refers to month 1. It implies that your tax depends on your pay in the current pay period (not the whole year).
These are the major reasons that affect deduction on your payslip:
- Cheap loans or loans without interests
- Your Salary package
- Payments on expense
- Travel and subsidence
- Pay based on performance
For further details on tax implications and payslip fluctuations, you are advised to visit the HMRC website or contact our chartered accountants.
Quick Sump Up:
Hopefully, you have known all about ‘What is PAYE and What Affects Deductions on your Payslip’. Just make sure that your tax code is correct as per your circumstances. In case if your payslip is not accurate as it should be, discuss the issue with your payroll department. As sometimes it is difficult to calculate your payslip, even by the payroll department, if you’re working on an hourly basis. Mistakes might occur if your payroll department is not experienced enough to deal with hourly pay. Still, if your working hours are not tracked accurately, contact our skilled accountants in London for assistance.
Disclaimer: This informational blog provides a general understanding of the topic.