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I just started working in the UK for the first time and received my first payslip. Another colleague of mine got his second payslip here, from the same company.

We were surprised that in the detail no amount for "Tax" was deducted.

I researched a bit and found that for the tax code 1060L, specified in our payslip, we got some tax free income for a while.

However, since I'm not an English native speaker, I still have some doubts on how it works.

As I understand it:

  • I am entitled to 10600£ per year tax free and until I reach that value, I won't pay tax;
  • When I do reach 10600£, taxes will be deducted as for everybody else;

Is this correct?

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    Have you considered just asking HR (or whoever handles payroll) to explain the tax process to you? That's generally what they're there for and I would think they wouldn't mind explaining this, especially to people who are new to the (British) workplace. – Lilienthal Oct 29 '15 at 13:50
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    @Lilienthal, yeah, already requested that but they are pretty busy, it seems, so I'll have to try later – chiapa Oct 29 '15 at 14:39
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    @Lilienthal, I just spoke to someone from the financial department. The answer is James': since I will only work for half the tax year (6 months) I'll have to reach the £5300 (half of £10600) to start being taxed on my income. I will reach it in November and pay little tax and in the December I'll already be paying the full tax. – chiapa Oct 29 '15 at 16:31
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This answer is a conclusion of a discussion in chat

Your income and tax will look like this:

enter image description here

You also asked about a monthly salary of 3750. enter image description here

  • I used Excel for this and assumed 20% tax, even though some of it might fall into the 40% tax bracket.
  • I assumed the tax free allowance next year will remain £10600

Assuming you are paid monthly and you started work in October, this year, you will have
(10600 / 6) = 1766.66 per month tax free. That means you'll have to be earning £1766 per month before you pay tax.

Your colleague will be working 7 months this tax year. They will have to earn more than
10600 / 7 = 1514.29 before they pay tax.

  • Yeah, I did that math myself and it seems right on my case. My pay slip says Total Gross Pay: £1744 so, I don't pay tax from that as it's under the £1766 value you mention. But in my colleague's case it doesn't match up: he got around £3700 total gross pay and his tax is zero too. How to explain this? – chiapa Oct 29 '15 at 12:00
  • Not sure about your colleague then. He should definitely be paying tax earning that much, probably even some in the 40% bracket. I expect it's just a clerical error somewhere. He'll need to pay the tax at some point. – James Webster Oct 29 '15 at 12:18
  • That's not how tax calculations for Pay As You Earn (PAYE) work in the UK. See Ganesh's answer. – AndyT Oct 29 '15 at 12:20
  • @AndyT, Ganesh's answer agrees with mine. Particularly this part: you get to "catch up" with all the allowance you haven't had so far. – James Webster Oct 29 '15 at 12:22
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    @JamesWebster - No, there is not agreement. Your answer states that the tax free amount is divided by the remaining number of months in the tax year. This is wrong. For each payslip your tax free amount year-to-date is calculated. If your earnings year-to-date are less than this, then you will pay no tax. If your earnings year-todate* are greater than the tax free amount year-to-date then you'll pay tax on anything over that amount. [cont] – AndyT Oct 29 '15 at 12:27
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Tax in the UK is handled on a monthly or weekly basis depending on how often you are paid, so your tax code means that for each month, you will get £10600/12 = £883 tax free and then the rest will be taxed. That means that normally people get about the same amount in each pay packet throughout the year, rather than initially paying no tax and then suddenly starting to pay tax

However, the allowance is actually an annual one for the entire tax year, from April 6th 2015 to April 5th 2016. So in your case if you haven't been working in the UK from April until you started this job, you get to "catch up" with all the allowance you haven't had so far. So in practice you'll get about £5300 of pay tax free and then will start paying tax at the usual monthly rate. That probably explains why you are paying very little tax in the initial months of your employment.

  • How did you come up with the £5300 value? – chiapa Oct 29 '15 at 11:06
  • @chiapa, because we're ~ halfway through the tax year. 10600/2 = 5300. (Actually 7 months through, so this isn't quite accurate) – James Webster Oct 29 '15 at 11:42
  • OK, but that doesn't explain why my tax deduction is zero on my payslip. It should be £883 per month tax free. Since I have earned more than that, some tax should be paid instead of zero. As you say, I should be paying little tax initially but the case is I'm paying zero tax. My colleague is on his second month and he paid zero tax in each of them – chiapa Oct 29 '15 at 11:47
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    If your total gross pay so far is less than your tax allowance for the year so far, then it makes sense that you would have paid no tax yet. – GS - Apologise to Monica Oct 29 '15 at 12:06
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    @DanPantry - Possible reasons are 1. When starting new jobs you haven't handed over p45s, resulting in emergency (month 1) tax codes; 2. You've never started a job so far through the year that your first payment is less than your accrued tax-free allowance – AndyT Oct 29 '15 at 17:02
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I've never had consistent pay for the first couple of months in a new job (UK). Typically there's no tax taken in the first month, most of the first month's tax in the second, and by the third month things have settled down. Although using up the personal allowance over the first few months is sometimes seen, I'm more used to seeing two months of unusual pay then tax taken at a rate to spread the remaining allowance evenly over the rest of the year. Your pay may change again by more than you expect at the new tax year. In particular as the same personal allowance is spread over more months, your net pay may go down in April (assuming you didn't have a job for the first few months of this tax year)*.

I suggest two things:

  • You figure out roughly how much tax you should have paid in the first month, and make sure to not spend that as your second month's pay may be short a similar amount.
  • At the end of the tax year you compare your P60 to an independent figure (actually the P60 can be a couple of months after the end of the tax year, but you can also use the year-to-date figures on your March payslip).

There are many online tax calculators to help you calculate your expected values. I won't recommend one as I haven't used any -- I tend to throw together a spreadsheet from HMRCs allowances data.

If you've had another job in this tax year, you'll need to take into account the figures on the P45 from that job. If you haven't received a P45 yet, your final payslip should give you that information. It's also possible you'll have to take into account any benefits you've received.

*A bit more detail of how pay can go down in April. You're on a salary of £12,000 PA and you start a job at the beginning of June (having not previously worked this tax year). You therefore earn £10,000 over the course of the tax year, which is less than the personal allowance so you pay no income tax. Next year your salary is unchanged, but you work the entire year, thus over the course of the year you'll be taxed on (£12,000-£10,600=£1400) at 20%. That's a tax bill of £280 over the year, which is likely to be deducted in the form of around £23 per month -- your monthly pay goes down by £23.

A few caveats to this:

  • I've ignored NI and any pension contributions.
  • The personal allowance normally goes up a little.
  • I could easily work a different example with a higher salary (£24,000 salary, start in November, pay goes down £223pm in April as no tax is due in the starting year).
    • Remember the personal allowance is annual. (NI works completely differently, on a weekly basis, but may be regarded as another tax).

tl;dr It will fluctuate at first, the year-end figures matter the most.

  • Chris - you're making the same mistake that James originally made - your personal allowance isn't spread over the remaining part of the tax year, i.e. your statement that "your net pay may go down in April" is manifestly wrong (assuming no changes to gross pay or annual personal allowance). Also I cannot conceive of a situation whereby tax is taken a month after the pay was given. That said, your tl;dr is spot on. – AndyT Oct 29 '15 at 17:11
  • @AndyT I'll edited in how your pay can go down in April -- too long for a comment. As for tax being taken a month late, remember the the employer and employee both have to fix it by the end of the year, and it's possible for the payroll people to get and apply confirmation of the tax code while not taking account of YTD earnings, thus under-deducting the first month and fixing it the second. This is more liekly if you join around the payroll cutoff date, i.e. towards then end of a month. – Chris H Oct 30 '15 at 9:41
  • @ChrisH - Good example, I hadn't considered that. I concur that your net pay may go down in April if you did not earn enough in the previous tax year to pay any tax. With respect to payroll when you start - if you haven't given them a p45 or filled out a p46 (I think that's the right one, the one that says "I have no earnings yet this tax year") then they should put you on an emergency tax code (also known as a "month 1" tax code). This means that you are taxed assuming that you have already used up your previous months' personal allowance. [cont] – AndyT Oct 30 '15 at 10:03
  • [cont] I won't say for certain that all payroll departments do successfully follow this though. If you join too late in the month for payroll to sort you out, in my experience you don't get any pay in your first month, and you get all to date in your second month; I admit that is personal experience and not a requirement though. – AndyT Oct 30 '15 at 10:05
  • All that said, your post still says "tax taken at a rate to spread the allowance evenly over the rest of the year", which is incorrect. – AndyT Oct 30 '15 at 10:06
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CORRECT ANSWER FOUND!

I'm new to the UK and also started work in September 2015. It also drove me insane I had such a hard time understanding how the taxes worked. After a lot of research, I came upon this thread, and read the whole thing, including the bits in the chat where James, you posted the final excel table.

Then I actually realised HMRC gave a pretty useful tool for tax calculations for a given pay date anytime during a given tax year. There it is: tax calculations

And I'm happy to say: the final table was correct! Chiapa, you can check for yourself with this tool.

To sum up, your taxes are calculated as followed (if you're taxed 20% and allowance is 10,600 per tax year, or 883 per month):

  • cumulative income tax = 0.2*(income cumulative- tax free cumulative)
  • income tax paid on month (n) = cumulative income tax on month (n) - cumulative income tax on month (n-1)

:)

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In the UK, you pay income tax for your income in a tax year, which is from April to March. Roughly speaking, currently there is I think £10,600 of income tax free, then you pay 20% tax on the next £31,000 or so, 40% on another £110,000 and finally 45% on the rest (I'd love to have that problem).

Your employer should make sure that you pay the same amount of tax every month, and that over the tax year you pay the correct amount. If you started work in January and you make £2,000 a month, then your employer can see that you will make £6,000 in the tax year, which is tax free, so you don't pay tax.

If you started work in January and you make £4,000 a month, then your employer can see that you will make £12,000 in the tax year, so you should pay 20% of £1,400 = £280 in that year, so they should deduct about £93.33 of tax every month, so at the end of the year you have paid the right amount.

If this wasn't your first job, then they need to take into account what you made in your previous job, and how much tax was paid in your previous job; you would have a form P45 from your previous employer, which you hand to your next employer so they can do the tax calculation correctly.

"Emergency tax" was mentioned elsewhere: If you switch jobs, and you don't hand over your P45, then the next company doesn't know how much you made in your previous job. They must make sure that you don't pay too little, so they will assume that you made tons of money and have to pay 45% on everything you earn above that, so they will actually deduct 45% tax from your salary. That's called emergency tax. (I might be wrong and it might be only 40%). Of course you can do your tax return at the beginning of the next tax year in April, and HMRC will see that you paid much too much tax, and refund every penny that you overpaid.

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Your payslip should not show tax deductions until you have fully utilised your cumulative personal allowance for the tax year, if you started working somewhere in the middle of the tax year. example, Starting date: 01/01/2016 Salary: 2500

Income tax = 20%( £2500 - £7947(883 *9) ) = 0

£7947 is cumulative personal allowance for 9 months from April, 2015 to Dec, 2015.

This employee will not pay tax for the entire tax year of 2015/2016 as his total income is only £7500 (3*£2500), which is below the personal allowance. Assume tax has been deducted by mistake from his income, it will be rebated later on.

Correct me if I made any mistake.

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