Confused about 'tax free income'

Question

I'm from New Zealand and just started working here in the UK in July 2016 on a 2 year working holiday visa. My partner and I both started working around the same time (different employers), however I noticed that the deductions on our pay slips were immediately different, despite being on a similar hourly rate (note that we are also on the same visa).

Tax and NI were deducted from my payslips immediately, whereas his employer started deducted NI, but no tax at all for the first few months. I did a little research and discovered that we are entitled to a £11,000 tax free allowance. His employer opted not to deduct tax until he reached £11,000 income threshold, then started taxing at 20% thereafter.

However my employer started deducting income tax from my first payslip, but have also informed me that they have been using the correct tax code, therefore my taxes should be correct and I am unlikely due a tax return in April.

So how does this work? Why didn't my employer start taxing me until after I reached £11,000 income. And since they didn't, why would I not be due a refund for all of all taxes I paid during that period? Very confused to say the least!

We are leaving the country in June to return home for good, so overall I would have been working for less than a year by the time we go. Would love to understand what this all means before we leave!

Could someone please explain this to me in layman's terms, as I am finding it really difficult to understand the UK tax system.

Answer 1

Why your partner's employer has decided to wait until he has crossed the threshold then tax him I have no idea. This makes no sense to me since it could leave you very short for the months he didn't pay any and is paying extra to make up the missing tax.

The idea is that you pay a little each month based on your projected earnings throughout the tax year. In the UK, this tax year runs April 6th-April 5th.

Since you started work in July, let's assume you will work for 9 months of the tax year but you still get the £11,000 threshold for the whole year.

How does this work in real terms? Let's assume a figure of £10.00 an hour over a 35 hour week so: £10 x 35 = £350 per week £350 x 52 weeks = £18,200 £18,200 / 12 months = £1516.67 per month

These are all before tax.

With an allowance of £11,000 per year, your expected income tax is 20% of £7,200 or £1440 per year or £120 per month.

National Insurance is 12% of earnings above £155 per week or £23.40 per week on your assumed £350 per week ((350-155)*.12) which works out to £1216.80 per year or £101.40 per month.

Both of these are based on a year's earnings of course. Over 9 months, the income tax becomes £160 a month and the NI becomes £135.20. Since your partner hasn't paid any tax up to this point, to have to pay £2656.80 over the remaining 2 or 3 months of the year is ludicrous and unless you've saved the untaxed income, you might find yourself in financial trouble.

If your partner's employer is only taxing 20% after reaching the threshold then there's a chance he will underpay tax and be hit by measures next year. He can either contact HMRC and get this sorted now (depending on how much tax he pays over the next couple of months) or talk to him employer to get it sorted.

As for next year, your threshold resets in April and you'll continue to pay tax as normal for the three months you're working in the UK however, you can tell HMRC you're leaving the country at https://www.gov.uk/tax-right-retire-abroad-return-to-uk and they will work out if you're entitled to a refund.

Answer 2

The national insurance contributions, both yours and the company's, should be paid weekly or monthly based on what you made in that week or month. If you worked only one month in a year, you pay for that month.

Income tax is charged based on your total income during a year, April to March. The employer should deduct it so that your total deductions for the year equal what you owe in tax; this might not happen. At the end of the year you get your P60 form which says what you earned and what tax was deducted, and then you fill out your tax return, and if you overpaid the money will be paid back. If you work April to June then it is most likely that you will be overpaying but you can do a tax return and you get your money back. It could be that you need to wait with the tax return until next April. You can always call HMRC; I have always found them helpful. (Just noticed Stephen posted a useful link).

What your employer did is just daft. Unless you make > £44,000 a year, you monthly tax (not counting NI) should be your monthly salary, minus about £950, and 20% of that. So they deducted much too little for the first months, then too much for the last months, but if you stay there until the end of the tax year it should even out and you should be fine. If you left right now, you would owe the tax man money.

Answer 3

The PAYE (Pay As You Earn) system in the UK is designed to avoid nasty tax bills at the end of the year.

At the start of each tax year, your expected income is assessed, and you're allocated a tax code. That tells the employer how much to deduct from your pay every month. That way, your take-home pay every month remains the same for the whole year.

So long as your income remains roughly constant, you might never need to fill out a tax form, pay an extra tax bill or receive a tax refund. It all gets sorted out by tweaking the tax code.