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Tax Rebate
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Can you help us understand a tax rebate situation.
For 6 months the salary was £62k pa. A change in job and some downsizing in hours saw a change to £27k pa from, conveniently, 1st Oct.
Naturally the first half of the year was taxed at the higher earners rate. Will there be a tax rebate due now. Or will it come at year end? The total earnings for this year will be £44.5k. There are no other incomes and a regular single persons tax code.
Is it possible to get a rough idea how much the rebate will be? Maybe there's an online calcuator tool to help?
For 6 months the salary was £62k pa. A change in job and some downsizing in hours saw a change to £27k pa from, conveniently, 1st Oct.
Naturally the first half of the year was taxed at the higher earners rate. Will there be a tax rebate due now. Or will it come at year end? The total earnings for this year will be £44.5k. There are no other incomes and a regular single persons tax code.
Is it possible to get a rough idea how much the rebate will be? Maybe there's an online calcuator tool to help?
Answers
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NB: The following assumes that the figures you've provided show the person's sole income. If there's any additional income (from, say, investments or a pension) they might not correctly reflect the tax situation, as income tax is charged on aggregate income, not separately on different parts of it:
The system will have initially assumed that the total pay for the year would be £62k. For a full year at that rate the tax payable would be calculated as follows:
The first £12.5K is free of tax.
The next £37.5k is taxed at 20% (= £7.5K)
The remaining £12K is taxed at 40% (= £4.8K)
Giving a full year's tax bill of £12.3K
However that pay rate only prevailed throughout the first 25 weeks of the tax year, so the tax that should have been taken up until that point was 25/52 x £12.3K = £5,913.
The revised total income for the tax year will now be (25/52 x £62K) + (27/52 x 27K) = £43,827.
So the revised bill for the year will now be worked out as follows:
The first £12.5k is tax free.
The remaining £31,327 is taxed at 20% = £6,265
Since £5,913 has already been taken in tax during the first 25 weeks of the tax year, that leaves £325 to be collected over the remaining 27 weeks. That equates to £12.04 in tax to be deducted each week (which is equivalent to £52.17 per calendar month).
So it's likely that rather than paying £241.67 in tax each month (as someone who has been paid at a rate of £27K throughout the entire tax year would), the employee will now pay just £52.17 per month in tax until the end of the tax year. That's the way that the books are usually balanced, rather than through paying a tax refund (either now or at a later date) and then charging the employee the 'full' rate of tax (i.e. £241.67) based on a salary of £27K.
If it is done that way (as I'm reasonably confident that it will be) the employee will need to remember that his/her monthly take home pay will be artificially high until the end of the tax year (because he/she will have already paid most of the tax that's due) and will then drop back to 'normal' at the start of the next tax (i.e. about £190 less per month than he/she will have been receiving during the latter part of the current tax year).
The system will have initially assumed that the total pay for the year would be £62k. For a full year at that rate the tax payable would be calculated as follows:
The first £12.5K is free of tax.
The next £37.5k is taxed at 20% (= £7.5K)
The remaining £12K is taxed at 40% (= £4.8K)
Giving a full year's tax bill of £12.3K
However that pay rate only prevailed throughout the first 25 weeks of the tax year, so the tax that should have been taken up until that point was 25/52 x £12.3K = £5,913.
The revised total income for the tax year will now be (25/52 x £62K) + (27/52 x 27K) = £43,827.
So the revised bill for the year will now be worked out as follows:
The first £12.5k is tax free.
The remaining £31,327 is taxed at 20% = £6,265
Since £5,913 has already been taken in tax during the first 25 weeks of the tax year, that leaves £325 to be collected over the remaining 27 weeks. That equates to £12.04 in tax to be deducted each week (which is equivalent to £52.17 per calendar month).
So it's likely that rather than paying £241.67 in tax each month (as someone who has been paid at a rate of £27K throughout the entire tax year would), the employee will now pay just £52.17 per month in tax until the end of the tax year. That's the way that the books are usually balanced, rather than through paying a tax refund (either now or at a later date) and then charging the employee the 'full' rate of tax (i.e. £241.67) based on a salary of £27K.
If it is done that way (as I'm reasonably confident that it will be) the employee will need to remember that his/her monthly take home pay will be artificially high until the end of the tax year (because he/she will have already paid most of the tax that's due) and will then drop back to 'normal' at the start of the next tax (i.e. about £190 less per month than he/she will have been receiving during the latter part of the current tax year).
Thanks for detailed calculations there. I followed them and agree that on a manual system they would be logical. ie rather than have a rebate, the tax payments would be reduced for the second half of the year.
However I wonder if the Real Time HMRC system has any concept of the whole year? Does it just deal with the actuals as they come though each month?
However I wonder if the Real Time HMRC system has any concept of the whole year? Does it just deal with the actuals as they come though each month?
Yes. I have experience of this. if you are on paye you will get a partial rebate (by paying much less tax ) each month over the rest of the year. it will probably pretty much sort itself out by the end of March. There may be some fluctuations and you may have a negative tax deduction in your first pay slip at the lower rate.
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