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Personal Allowance

Discussion in 'The Lounge - Off Topic' started by westernkings, Jan 18, 2009.

  1. westernkings

    westernkings Gigabyte Poster

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    Hey guys,

    Personal allowance per year in the UK is 6.2k give or take isn't it ? this is the amount you can earn per year before you get taxed.

    here is my question, what happens come the next financial year ? heres what I mean;

    £10008 per year translates to £725 after tax. £850 during the personal allowance amount. So now earning 725 a month what hapens when the year switches over ? does that go back to 850 a month ? which means no tax until the personal allowance threshold has been reached?

    or is it simply regular tax as per usual and then a refund at the end of the year to compensate for the tax taken during the personal allowance amount ?

    Don't know if I explained it properly, hopefully you will get what I mean.
     
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  2. UKDarkstar
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    UKDarkstar Terabyte Poster

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    err, not quite sure what you mean but tax years run April to April and the following year your tax code will be adjusted. Employers tend to do this automatically with payroll programs (such as Sage Payroll) and only change it if instructed by IR.
     
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  3. greenbrucelee
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    greenbrucelee Zettabyte Poster

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    It depends on your tax code on how much personal allowance you get. If your tax code was say 445L then that would mean your allowance was 4450. The more you earn the more you get taxed. Your tax code usually changes every year.

    Apparently its best not to go abvet 45k
     
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  4. Arroryn
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    Arroryn we're all dooooooomed

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    I mainly ignore my personal allowance; it's quite static, and unless something drastic happens it going slightly up or down from one tax year to the next has very little implication on your net salary.

    I always work my salary after tax and deductions to be around 75% of gross; that's worked for me for the last five years, so I'm not going to change the methodology any time soon :biggrin
     
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  5. greenbrucelee
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    greenbrucelee Zettabyte Poster

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    Yep that is the way to do it. Tax in total is about 33% unless your on big money, I think it 22% income tax and 11% national insurance but basically what Arroryn says is the way to work it out.
     
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  6. UKDarkstar
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    UKDarkstar Terabyte Poster

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    For a quick calcualtion I use this which is for contractors. It won't take into account any pension or other deductions but does the basics of NI and PAYE.
     
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  7. dmarsh

    dmarsh Terabyte Poster

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    Its all explained in the rules for PAYE which is an automated Income Tax system, and yes I did write part of a payroll system once.

    Generally you get given a tax code that represents your Personal Tax Allowance. This personal allowance iis the amount you can earn in a tax year before any income tax is liable. This is used to calculate the amount you can earn each pay period before you are liable to tax, tax is then paid on the remaining amount in the familiar tax band system, higher rates of tax are due in each band, you enter higher tax bands the more you earn.

    This is then used with some rather basic math to take a proportion of your earnings from each pay packet throughout the year.

    If you stop working halfway through a year you will have overpaid and you will eventually get a rebate.

    If you get given the wrong tax code you will end up overpaying or underpaying, its common for people to be put on emergency tax codes which are quite high and for them to get rebates etc.

    Basics are here :-

    http://www.hmrc.gov.uk/incometax/codes-basics.htm

    The math and routines are explained here rather well :-

    http://www.hmrc.gov.uk/ebu/payerout11.pdf

    Also see here :-

    http://www.direct.gov.uk/en/MoneyTa...innersGuideToTax/IncomeTax/Taxcodes/DG_078568
    http://www.adviceguide.org.uk/index/life/tax/the_pay_as_you_earn_paye_system.htm
    http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1073866903
    http://www.hmrc.gov.uk/helpsheets/e13.pdf
    http://www.hmrc.gov.uk/guidance/cwg2.pdf
    http://www.hmrc.gov.uk/ebu/ebu_paye_ts.htm

    You allowances change each year mainly due to the budget which is why the tax code changes every now and then.

    If you get multilple streams of income or are a higher rate taxpayer you will need to fill in a personal tax return and therefore your allowances do become important.

    Since the current bands are :-

    Basic rate: 20%** £0-£34,800
    Higher rate: 40% Over £34,800
    (** Controversally the old 10% rate band was dropped in 2008.)

    Note I beleive these only apply to your taxable income, that is the amount above your personal allowance.

    Most people will lose around 25% of their pay in PAYE and NIC's.

    I think thats about it, maybe some of the ex IFA's on here can give a better explanation ! :D

    You should earn roughly the same amount every month under PAYE, it averages your allowance over the year, if you work a whole year with the correct tax code every pay packet should be taxed equally (in terms of percentage).
    You will generally pay tax on all pay packets under PAYE. PAYE means you pay tax equally throughout the year assuming continuous employment, only if you earn a small amount, then quit work for the rest of the tax year will you have overpaid as it assumes you will use your allowance throughout the year, which is this case you probably will have not used your allowance under the PAYE system.

    If everything is correct there should be no overpayment or underpayment and thus no refund. Tax should not be taken from your personal allowance amount unless your code changes because of personal circustances or it was wrong to start with.
    If there is a change they can alter the code and let the code change bring you back in line throughout the rest of the year or issue a refund, it depends.

    Interestingly Payroll procesing was one of the first applications of computers.

    Thats how I understand it as I can remember, it was a long time ago and i'm not a tax expert ! :D
     
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  8. westernkings

    westernkings Gigabyte Poster

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    Great tool, Thanks, Rep Added

    Spot on what I was after, sorry for not explaining it very well. Cheers. Rep Added
     
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