Understanding PAYE Tax UK

Understanding PAYE Tax UK

If you work in the UK, you’re probably no stranger to the PAYE (Pay as You Earn) system that employers use to calculate and deduct tax and pay National Insurance. In Ireland, the same method is used to calculate Universal Social Charge and Pay Related Social Insurance (PRSI).

  • How exactly are PAYE Tax Refunds calculated?
  • Can employers who pay in cash deduct tax from wages?
  • What are gross and net pay for tax purposes?
  • When do you overpay tax?
  • What are the qualifications to be eligible to Claim tax back?

You’ll know the answers if you grasp what the PAYE system is all about. The more you understand how the system works, the more you’ll learn about your rights as a taxpayer.

Now that the End of the tax year 2017 is here, it is the best time to talk about tax and the Tax Refund UK.

What is PAYE (Pay as You Earn)?

As previously mentioned, the system used to pay income tax and National Insurance Contributions (NICs) are deducted from employees’ wages or occupational pensions before an employee is paid.

So whatever amount you receive in your bank account has already been deducted from tax and NIC.

Since the calculation is done on your wages, expect everything to be considered, including sick pay, adoption pay, and maternity or paternity pay. Everything else that is tax-deductible will be included in the calculation.

Employer Responsibilities

  • Calculate and deduct tax and NIC on your behalf.
  • Send tax to HM Revenue and Customs (HMRC).
  • Provide a pay slip with details of all the deductions from your pay. Pension payment, if you get one, may not come with a pay slip every single time.
  • Provide a form P60 that shows the total amount paid to you and the total deductions made for the previous tax year.

How will employers know how much tax is deducted?

They base it on the tax code that HMRC provides. An emergency tax code will be provided if more information is needed to issue a complete tax code.

Issues with the tax codes, such as failure to switch from an emergency tax code to the full tax code at the right time, can mean overpaid tax and a substantial Tax Refund.

Which dates are included in a tax year?

The tax year starts on 6 April and ends on 5 April the following year. So the End of the tax year 2017 talks about the tax year 2017/2018 that started last 6 April 2017 and ended on 5 April 2018.

Other applications of the PAYE system

It is also used to collect income tax on other taxable income and other sources of income.

For example, if you pay an occupational pension, the tax on your State Retirement Pension will be deducted through PAYE. The same is true for rent, untaxed interests, and other tax-deductible income.

Any money you owe HMRC, such as tax debts and overpaid tax credits, will also be collected through PAYE.

Why is it essential to understand PAYE Tax?

To ensure you don’t overpay or underpay tax. Overpaying may mean a Tax Refund, but underpaying means a penalty from the HMRC.

If you’ve been working in the UK, you may be entitled to claim a UK tax rebate. You may wish to utilise our Self Assessment on Tax Returns UK.

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