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Understanding how much income tax you pay
Understanding how much income tax you pay
Rebecca Russell avatar
Written by Rebecca Russell
Updated this week

In an ideal world, we'd pay the same amount of tax each pay day. However, our tax depends on several factors. This article focuses on the factors that impact how much tax we pay, as well as some common misconceptions about paying tax.

Changes to your tax code

Your tax calculation is based on your tax code. Your tax code determines:

  • The personal allowance you have.

  • Whether you have additional pay to be taxed.

  • Whether the calculation is based on the full tax year, or a single pay period.

  • The rate of tax you pay.

If your tax code changes then the amount of tax you pay will most likely change.

Changes to your tax basis

If your tax code changes from a cumulative to non-cumulative basis, this can impact the amount of tax you pay.

A non-cumulative tax code usually ends in week 1/month 1, or W1 or M1.

A non-cumulative tax code is used to calculate your tax as if you're being paid in the first period of the tax year. It means you don't benefit from any accumulated personal allowance and any over or underpayments of tax are not considered.

You've over or underpaid tax in previous months

If you've over or underpaid tax in a previous month, and you're on a cumulative tax code, this will be corrected the next time you're paid.

This means that if you overpaid in an earlier month, you'll pay much less or even receive a refund in the next period. Likewise, if you've underpaid, you'll pay more tax in the following period.

This minimises the chance you'll owe or be owed tax by the end of the tax year. It means you won't receive an unexpected letter from HMRC, and you won't need to wait until the end of the tax year for a refund.

You provide a P45

If you've recently left another employer, and you provide your P45 to your new employer, this might contain your taxable pay and tax from your previous employer. When your P45 details are included in your next tax calculation, provided you're on a cumulative tax code, your tax will include those values.

Your earnings have changed

Each pay period your tax is calculated assuming you'll earn the equivalent to your current month's earnings each period going forward. This means that an increase in your earnings could lead to you paying more tax and at a higher rate.

However, if your earnings are reduced, you may pay less tax and at a lower rate.

Things likely to increase your taxable pay include:

  • Overtime

  • Bonuses

  • Pay increases

Things likely to decrease your taxable pay include:

  • Salary sacrifice

  • Unpaid absences

  • Reducing your hours

The regulatory limit

The regulatory limit is set by HMRC and is in place to cap the amount of tax that can be deducted each period, particularly if you owe tax from earlier periods.

The limit set by HMRC means that your tax will never be more than 50% of your taxable pay. So if your taxable pay is £2,000 you'll pay a maximum of £1,000 tax.

Myths about tax

"You'll only pay tax once you've reached your annual personal allowance"

The annual personal allowance is divided by the number of pay periods you're paid in the tax year. For example, if you're paid monthly, each month you'll receive 1/12th of your annual personal allowance. Any earnings that exceed this personal allowance are taxable.

"An employer knows why your tax code has changed."

HMRC doesn't tell your employer why your tax code has changed. This is to protect information about your personal circumstances. Tax codes are influenced by more than just pay from your employer. If you're unsure why your tax code has changed, log in to your Personal tax account, or contact HMRC.

"An employer can intervene if an employee owes tax."

An employer can only deduct tax as instructed by HMRC. Your employer can't adjust your tax code or the tax you pay.

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