Why Is My Income Tax Different?

Income Tax

One of the things contractors have to get used to is that their pay, and therefore their income tax, varies according to how much they work. If you work more in a particular week or month, you’ll earn more and you’d expect to pay more tax in that period.

However, sometimes the variable nature of contractor pay can combine with the UK PAYE system to produce unexpected variations, so you can pay a different amount of tax on the same amount of pay, at least in the short term. The aim of this article is to explain how the system works, so you can predict when your tax might vary.

It’s important to note that, as long as you have a standard tax code, you’ll pay the same amount of tax in the long term, whenever you’re actually paid. We’ll explain what to do if you have a non-standard tax code later on in this article.

Your tax-free personal allowance

The standard personal allowance for 2018/19 is £11,850. This means that most UK tax payers don’t pay any income tax on the first £11,850 they earn. However, in practice this doesn’t mean that you pay no tax until you’ve earned more than your allowance. If you’re paid through the PAYE system, like all UK employees should be, this allowance is spread evenly throughout the tax year. All our umbrella employees are paid in this way.

If you’re paid weekly, it’s split into equal weekly amounts, and if you’re paid monthly it’s divided up monthly.  

Pay frequency Standard Personal Allowance
Weekly £228/week
Monthly £988/month
Annually £11,850/year

So, you don’t pay income tax on the first £288 per week, or £988 per month depending on the pay frequency of your current contract. Your tax is calculated using your earnings and allowance for the year to date each time you’re paid.

If you have a period when you’re not paid

If you have a period when you’re not paid, for example if you take a break between contracts or you don’t work during school holidays, you’ll often pay less tax immediately afterwards.

This is because the allowance for the tax weeks or months that you “missed” is accounted for in your next payment.

For example: Imagine you’re paid weekly, and you’re paid in each of the first four weeks of the tax year. Each week you’re paid for one additional week, and you receive one additional weeks’ allowance: 

Tax week 1: 1 week’s allowance, 1 week’s pay.

Tax week 2: 2 weeks’ allowance, 2 weeks’ pay.

Tax week 3: 3 weeks’ allowance, 3 weeks’ pay.

Tax week 4: 4 weeks’ allowance, 4 weeks’ pay.

Assuming you earned the same amount each week, you’d expect to pay the same amount of tax in all these payments.

Now imagine you have a gap of 2 weeks when you don’t get paid.

Tax week 5: 5 weeks’ allowance, not paid.

Tax week 6: 6 weeks’ allowance, not paid.

Tax week 7: 7 weeks’ allowance, 5 weeks’ pay. 

If each weekly payment is the same, you can expect to pay less tax in tax week 7, as the allowance for weeks 5 and 6 is accounted for. Depending on the exact figures, you might pay less tax, no tax, or receive a refund in tax week 7.
 

Returning to “normal”

This system ensures that your tax is correct each time you’re paid, given what you’ve earned at that point in the tax year. Once any adjustment has been made, you can expect your tax to return to what it was before your break, again assuming that you’re earning the same amount.

If you start work part way through the tax year

The UK tax year starts on the 6th of April and ends on the 5th of April the following year. If you arrive in the UK or start working part way through the tax year, you’ll have some allowance “built up”.

You won’t pay income tax until you’ve earned more than the accumulated allowance. Depending on when you start work and how much you earn, you might not pay any tax at all in that first tax year.

For example: Imagine your first weekly payment is made on 28/09/2018, which is 26 weeks from the start of the tax year.

When your first payment is made, you have 26 weeks’ allowance which is £5,928. Unless the payment is more than this you won’t pay any income tax on it.

The following week, you’ll have 27 weeks’ allowance which is £6,216. Again, you’ll pay no income tax unless the total of both payments is more than this amount.  This pattern will continue until the tax year ends on 05/04/2019.

The start of the new tax year

At the start of the new tax year, your earnings return to zero and your personal allowance returns to “week 1” or “month 1”. If you’ve paid no income tax up to this point because you started work part-way through the year, it’s likely that you’ll now start paying tax.

The standard personal allowance usually changes each tax year, so even if you’re paying tax already you will see a small change in the amount you pay when the new tax year starts.

Non-standard tax codes

Your tax code tells your employer what your personal allowance is. For example, in tax year 2018/19 the standard tax code is 1185L, which gives you an allowance of £11,850. If you have a different tax code this will affect the amount of tax you pay. If your tax code changes, the amount of tax you pay will also change.

It’s important to note that your employer does not set your tax code, and any change will be the result of instructions from HMRC, or documents you’ve submitted.

If you have a non-standard tax code or your code has changed and you’re not sure why, please contact HMRC on 0300 200 3300. If you’re employed by Orange Genie, our PAYE reference is 951 JZ 77244.

W1 or M1

If you see a W1 (week 1) or M1 (month 1) after your tax code (e.g. 1185L W1), this means your tax is being calculated using the figures for the current week or month, rather than the figures for the year to date. This means that gaps in your pay won’t be accounted for as described above.

W1 or M1 are most often used when you’ve completed a starter declaration (P46) instead of supplying a P45, and you’ve indicated that you’ve received taxable income already that tax year. However, if this is not the case or it goes on for several weeks/months we’d advise you to contact HMRC to resolve the issue.

If you have questions about your tax or if we can help in any way, please contact our expert team on 01296 489242 or email helpme@orangegenie.com.

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