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Tax Rebate

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Maydup | 23:27 Wed 20th Nov 2019 | Business & Finance
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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?

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Do you not have an accountant?
Question Author
No, simple life, nothing complicated, PAYE job.
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).
Question Author
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?
Never expect anything HMRC does to be logical!

However, to the best of my knowledge, their automated systems work in much the same way as when I was manually doing PAYE calculations for a friend's business. So I would expect my calculations to hold broadly true.

Question Author
Thanks again.

Does anyone else have experience of this and the likelihood of either a rebate being paid, or a reduction in tax payments spread over the remainder of the year?
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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