How do I work out my tax?
If you are an employee, your employer takes income tax and National Insurance contributions (NIC) off your pay before paying you. Your employer sends the tax and NIC to HM Revenue & Customs (HMRC). This system is called Pay As You Earn (PAYE). You need to be able to work out your tax, so that you can check your employer is deducting the right amount of tax from your pay.
What is PAYE?
The Pay As You Earn (PAYE) system is a method of paying income tax on employment income. It is the backbone of employee taxation and it is a very important factor when working out your overall tax position, so you need to be able to understand it.
PAYE spreads your tax and NIC over the tax year, rather than paying in one lump sum. Your employer collects tax from your wages using a code number, provided by HMRC direct to your employer while a copy of the code number and how it has been calculated is sent to you.
Each pay day your employer should give you a payslip setting out your pay and tax. At the end of the tax year, you should get a form P60 which sets out the total amounts paid to you and deducted from you for the previous tax year (your employer MUST give you this by 31 May following the end of the tax year).
The tax collected under PAYE is an estimate, and is not necessarily the exact amount you are required to pay. However, for many employees there will be little or no difference between the amount of tax deducted under PAYE and the amount of tax actually due on their employment income.
For further information on the PAYE system, see our page How do I check my coding notice?.
How do I work out my tax?
Remember that the tax year runs from 6 April one year to 5 April the next, for example, the tax year 2021/22 runs from 6 April 2021 to 5 April 2022.
Working out your tax position is basically a four stage process, which we set out in the tax basics section. In stages one and two, you have to work out your taxable income and any allowances or deductions you are entitled to.
In this employed section of our website, we provide further information on:
that relate specifically to employees.
You have to pay tax on any other taxable income that you have in the tax year too. So, if you have any other taxable income, you need to include this in your calculations.
If you live in Scotland and are a Scottish taxpayer, you will pay Scottish income tax on your employment income. Different income tax rates and bands apply to your non-savings and non-dividend income. There is more information in our pages on Scottish income tax. UK tax rates and bands apply to your savings and dividend income.
If you live in Wales and are a Welsh taxpayer, you will pay Welsh income tax on your employment income. The rates for Welsh income tax apply to your non-savings and non-dividend income. UK tax rates apply to your savings and dividend income.
Where can I find more help and information?
HMRC have online tools to help you check the tax you are paying in the current year and have paid in past tax years. These can be found on GOV.UK. In order to access some of these services you need to have a Government Gateway account.
Check out our list of other calculators, some of which deal with income tax and pay – including payslip checker, a minimum wage calculator and a company car and fuel benefit calculator.
Paul earns £20,000 per year, paid monthly (so £1,667 per month). His tax code is 1257L. This is Paul’s only income.
Under this tax code, Paul’s employer knows that Paul will be entitled to £12,570 of tax-free income a year or £1,048 per month. Each month, tax is calculated on £619 at 20% (that is, his £1,667 salary less £1,048). This gives £123.80 per month PAYE tax, or £1,485.60 at the end of the year.
At the end of the year when Paul wants to work out his tax, he can see the PAYE deducted from him is roughly correct:
- Salary £20,000
- Personal Allowance (£12,570)
- Total £7,430
- @20% £1,486
- PAYE deducted £1,485.60
Paul’s income tax position is balanced – there is no more tax to pay and nothing due back to him.