What is the PAYE tax?
‘Pay as you earn, ‘also known as PAYE, refers to the income tax directly reduced from your salary. This method was introduced in 1944.
Generally, employers pay their income tax (IT) through PAYE. The income tax is directly reduced from the salary every week or every month before receiving it at the source. The employer directly sends the tax to HMRC (Her Majesty’s Revenue and Customs) before he pays your salary.
However, some people continue to pay income taxes based on their self-assessment.
How is the PAYE tax calculated?
PAYE tax is calculated based on your earnings along with the personal allowance you receive. Personal Allowance is the amount on which no income tax return is liable.
The personal allowance is £12,570 for the current tax year 2021-22. Personal allowances below a specific price bracket qualify you to earn a tax-free year. A tax year starts from April 6 to April 5, the following year in the UK.
However, if you earn above the personal allowance, you will be charged 20 %,40%, or 60%. The income tax is then charged based on specific tax brackets, including the basic rates, higher rates, or additional rates.
Your personal allowance reduces by £1 for each £2 received over a taxable income of £100,000. However, you do not earn any personal allowance on an income over £125,140.
What is a tax code?
The employer or the pension provider uses the tax code to inform about the amount of tax that needs to be deducted from your salary or pension. The employer or the pension provider is made available your tax code by HMRC. You can know your tax code by visiting the Personal Tax Account portal online. The tax brackets and thresholds determine the amount of tax to be paid.
What if you paid more PAYE?
At the end of the tax year, if you paid more income tax, you will receive a refund, while if you paid less income tax, you would receive a bill for the remaining payable taxes.
If you earn less than £30000, the maximum income tax taken would be £3000 by Her Majesty’s Revenue and Customs while it can reach up to £17,000 if you earn over £90000.
Is there a PAYE tax on your state pension?
PAYE is also collected from people who receive a pension. You receive the pension after the income tax has already been deducted. The pension provider collects the tax before he provides you with the pension. The income tax collected is directly sent to the HMRC. Pensioners can not avoid paying taxes on pensions.
Her Majesty’s Revenue and Customs (HMRC) is the non-ministerial department of the UK Government. It is responsible for collecting income taxes, regulating national minimum wages, and issuing national insurance.
If you generate a pension from more than one source, income tax will be deducted from one of them by HMRC. Also, it would be your responsibility to declare all your sources of income and provide a self-assessment tax return to HMRC.
The PAYE tax will also be deducted from your state pension. A self-assessment tax return has to be sent to HMRC if you receive a pension from the state.
Any voluntary contributions to your pension scheme are not liable to any tax return. Therefore, IT is not owed to any voluntary contributions.
What is P60?
A statement known as P60 is received at the end of each tax year, i.e., April 5. Your employer or the pension provider provides it. The total amount of income tax deducted from your revenues is mentioned in the P60. It also mentions your PAYE reference number. It helps to ensure that a correct income tax has been paid to HMRC.
What is a PAYE payslip?
A payslip lists the total amount that has been paid as income tax. It also mentions your PAYE tax code. The payslip mentions the PAYE, your contribution to national insurance, or the student loan repayments.
What is a self-assessment tax return form?
The self-assessment tax return form is to be filled out once every tax year. If you are self-employed or are receiving a high income, you need to fill out the self-assessment tax return.
You must also fill out the self-assessment tax return if you earn over £1,000 from self-employment or £2,500 from other several untaxed forms of income.
However, if you pay income tax through the PAYE method, a self-assessment tax return form is not required to be filled out. The income tax is automatically deducted from your salary before handing it over to you.
The deadline for the submission of tax returns is October 31, while for submission of online tax returns, it is December 30. Moreover, if you owe a tax return less than £3000, you can directly pay your self-assessment tax return through PAYE.
If you are earning from self-employment along with an income from a company, the income tax you owe will already be paid through PAYE. You will not require to fill out the self-assessment tax return form.
What is National Insurance on your PAYE tax?
National Insurance is deducted from your monthly earnings if they are over a specific limit. Certain payments, including pension contributions that might be free of tax returns, are not free of National Insurances. However, reimbursed payments like mess allowances, council tax relief payments for armed forces, or mileage allowances (for those who own a car) are free of National Insurances.
How can you earn a tax-free PAYE?
Mostly, all your earnings owe you an income tax return. However, some payments are tax-free. These payments include reimbursed payments from your employer. These refunds are made after a formal agreement with HMRC. The tax-free expenses also include mileage allowances, additional payments for the household budget, and several other subsidies.
These additional tax-free allowances do not require any declaration for tax returns.
However, several additional payments like bonuses, overtime, holiday pay, commissions, etc., owe you a tax return and are included in your taxable income.