Tax clarification

[baskey]

Hi,

First of all HAPPY DIWALI for all our Indian friends and Good Wishes to all.
I have a question about Tax. recently i have been given normal tax code, which says 4750 is my personal allowance. I will be working for 6 months only in this financial year. In that case, these personal allowance and tax slabs will be considered based on my monthly salary rate or based on my entire income of the year.

Can anyone thorough some light on it.

Regards,

[try-one]

Your tax allowance goes from april to april every year....if you start working in feb (like me) then you have a tax allowance of £,4,700 or about, if your employer discounts the tax from your salary you can claim it back from the Inland Revenue. In my case they sent me a cheque because between feb and april i didn't used my allowance.....
if you have been working for the last 6 months, then you are using your tax allowance and it should have been included in the calculations to pay your salary so it won;t change athing....maybe if you start before april....

[baskey]

Hi Try-one,

Thanks for the reply. To confirm what your saying that for example assume £ 4700 as tax allowance and worked only for 2 months with total gross pay of £ 4500 ( for 2 months), in that case no tax will be deducted!!. Am i right? or that entire allowance £4700 will not be given and only on prorata basis for only 2 months will be provided.


Regards

[hk_007]

Thats right. The gross salary (April-April) minus 4750 will be subject to IT. If you make a private pension contribution then that may also be applicabe for deduction from your gross salary before personal allowance is applied.

And then if your gross is still below 4750 remember you can also claim tax deducted from any bank interest if the total (including interest) still remains below that figure.

[try-one]

correct, you need to either explain to your employer that you just came to the country and you haven't used your tax allowance or you can wait and claim it back.
If you have been working 6 months then you might have used it.

[John]

HK_007, you say, "that's right" but I don't think it is.

The OP says he has a normal tax code. Accordingly PAYE will be applied on a cumulative basis. That's means, for example, that half-way through the tax year one-half of the personal allowance will be used in the tax calculation. That should still mean no tax deduction in the first month.

However, and assuming the end of October is the second pay date in the UK, the cumulative pay to date clearly exceeds 7/12 of the whole year's personal allowance. Accordingly tax would start to be paid in the second month.

[try-one]

I beleive the "cummulative" reference is because NOT all the tax allowance will be used the first month......for example, you can not use your allowance to get your full salary the first two months and then pay full tax on the rest, your allowance will be assigned each month to your salary, in a sense the allowance is divided by 12 and then applied to your salary BUT if you got here two months before april, then you have your allowance unused, in that situation you either claim it back or you explain to your employer that you haven't used your allowance in a cummulative manner like all other employees, you justgot here and haven't used it....any way both options work, my wife's salary for the first two months after we got here were paid without any tax taken and my salary was taken the full tax minus the cummulative, i claimed back and got the refud.....so both work...

[John]

OK, re-reading the message from the OP, he says he will work for six months in this tax year. Accordingly it looks as if the first pay date will be at the end of October 2004 and the sixth at the end of March 2005.

So, if the code number is "normal", not Month 1 basis, the PAYE works on a cumulative basis. So at the end of October it will be a question of him being eligible for 7/12 of the year's personal allowance and that means there should not have been a tax deduction at the end of October.

However, at the end of November, he is entitled to 8/12 of the year's allowances .... compared to the pay to date in this this tax year ... and that will undoubtedly mean, on the supplied pay figure, that there will be a PAYE tax deduction at the end of November. Likewise in each subsequent month in this tax year there will be PAYE tax deducted.

[hk_007]

Personal allowance/12 is applied when person starts work at the beginning of the tax year (April) or if the person has a temporary tax code. In case of temporary tax code it might not be applied at all-depends on the employer. For those joining midway during the tax year (and have had no income till that point in that tax year) and have obtained the tax code, the personal allowance is divided by the number of months remaining to complete that particular tax year. For e.g. if a person joins in February, then the personal allowance is divided by 2 and applied to salary from Feb and March. If the gross salary in each month is then less than 2375, then there is no tax liability. Try-one has given a perfect example!!

The reverse is also true in that if person leaves say two months after the tax year, end of May and has no income thereafter in that tax year, then again personal allowance is divided by 2 and applied to each month’s gross salary.

[John]

For e.g. if a person joins in February, then the personal allowance is divided by 2 and applied to salary from Feb and March.

The polite version is ... absolute rubbish. That is not the way PAYE works at all. Don't take my word for it ... the Inland Revenue's website will confirm.

In the theoretical circumstances mentioned by you, and assuming the normal cumulative basis is being applied .... that is, Month 1 basis is not in force ..... at end February 11/12 of the Allowances are given by the tax tables .... and at the end of March, 12/12 of the Allowances ... both calculations taking into account the cumulative pay to date in the tax year, and also any PAYE tax suffered earlier in the tax year.

[hk_007]

It would definitely help if you read my post in full and carefully. The case I have mentioned is applicable if the person had NO INCOME for the previous 10 months of the tax year. In these circumsatances, your ENTIRE personal allowance is applied to your gross earnings in Feb and March. And if it is applied in the fractions you mentioned, then a REFUND can be claimed.

Read post by try-one once again. It is quite clear and thats how it works. I can say this with confidence since I have also got the complete tax allowance applied even though I started work in the UK midway during the tax year.

[try-one]

John,
I'm not an expert in PAYE or any simmilar thing, my advise was based solely on my experience with the Inland Revenue and two different set of accountants. I think many, many HSMP holders will arrive in the middle of the Tax year and I think it would be very helpful if you provide us with a complete reference to the TAX, PAYE position for them, that way they will save a lot of money.....
thanks

[John]

And if it is applied in the fractions you mentioned, then a REFUND can be claimed.

Once again your lack of knowledge of how cumulative PAYE works is letting you down. Why would a tax refund be due?

Let's keep this very simple. Someone has earned absolutely nothing in the UK up to and including January 2005. Then in February and March 2005 they earn say £3000 per month. Their tax code is say 474L.

Right ... February 2005 ..... 11/12 of the year's allowances say £4353. Pay to date = £3000 ... therefore as £4353 exceeds £3000 .. no PAYE tax deducted.

March 2005 .... 12/12 of the year's allowances say £4749 (the tax tables do round up) ... pay to date = £6000. Thus £1251 needs to be taxed ... tax of say £125.10 ... less tax deducted earlier in tax year .... £0.00 ... means tax of £125.10 deducted in March 2005.

No question of a tax refund, assuming that code 474L is the correct code.

[hk_007]

Gross for Feb + March = 6000, Personal allow = 4750, Taxable = 1250

Monthly : for Feb
Gross = 3000
PA = (4750/2) = 2375
Taxable = 625
March as above. Therefore total taxable = 625+625 = 1250

Similarly for Jan+Feb+March : Gross = 3 x 3000 = 9000, substract PA of 4750, therefore, taxable = 9000-4750 = 4250

Or monthly for Jan : Gross = 3000, PA = (4750/3) = 1583 .3, therefore taxable = 1416.6
Thus, taxable for Jan+Feb+March = 3 x 1416.6 = 4249.8

Same numbers simpler calculations. No need for tables and complicated words and formulas!!

In real life though, for some one starting a job in the UK in Feb 04, an IR assigned tax code will not become available till a few months later i.e. next tax year. And, since a temporary tax code is used for Feb-March, it will result in higher tax deductions and hence a refund of extra tax. Refunds also come into play when the employer subtracts PA even when no proper tax code is available. Usually the amount subtracted is less than the actual allowed.

[John]

The problem is that neither you nor I designed the tax legislation, the PAYE scheme, nor the tax tables that need to be used.

Accordingly it is not a question of one method being simpler or more difficult ... it is a question of employers needing to abide by what the tax legislation actually says.

How quickly a "real" tax code will be allocated varies considerable. Where a P46 has been completed, depending upon the way the form has been completed it might be possible for the employer to operate a "real" tax code immediately without needing to wait for Inland Revenue authorisation to do that.

[hk_007]

That's right . However, I think that this forum should try to give the CORRECT answer using the simplest words/methods possible. In this respect my first reply in this thread remains completely valid.

In addition, if personal negative remarks can be avioded a better discussion can be forthcoming. Cheers !!

[John]

In your first post in this thread you started :-

Thats right.

But your agreement with the previous poster was not right, it was wrong.

However I agree that the rest of your first post in this thread was indeed correct.