The PAYE process has changed a lot over the years. Today it is more automated than ever before but there was a time whereby it was calculated manually, using a complex set of printed tax tables. But even with so much certainty in the system we’re often asked why the monthly payroll amount changes throughout the year?
It’s a fair question, especially if you’re on a fixed salary. It would be easy to think that you should just receive a set amount each month based on the total salary, less tax, divided by 12 for monthly pay or 53 for weekly payrolls. But the way tax is calculated is not that straightforward and there are various factors which mean your salary will vary by month. Needless to say, the overall salary amount you get paid over the year evens out to that net figure but it won’t arrive in neat even chunks, and here’s why.
Why does my tax change every month?
One of the key reasons for your pay changing each month is down to tax. Each person is issued with a tax code which determines the amount they can earn before paying any tax in a given tax year. At present the standard personal allowance is £12,570, creating a tax code of 1257. This allowance is split evenly across a year and was previously referred to as ‘Free pay’.
The amount of tax you pay is then calculated on anything in your monthly salary beyond this allowance and what your projected salary is for the year. So, it is an individual calculation each month which gradually irons itself out over the year, such that in month 12 you are paying a balancing figure based on your final (and therefore cumulative) salary in that tax year. If the amount you are paid is consistent and sticks within the basic rate threshold, your tax won’t fluctuate too much. However, if your salary varies by month, you can expect the amount of tax to vary too as it tries to anticipate a final position for the year and tax you accordingly. This is most notable if it is likely that you will end up with earnings which sit on or exceed the higher rate threshold.
So, tax codes play a big part in what turns up in your monthly salary and that’s why you need to make sure yours is correct. It’s not unusual for them to change and for employees to have out of date or incorrect tax codes. Changes in your personal circumstances, such as changing jobs, getting additional benefits, and/or losing the benefit of a company car will affect your tax position and your tax code. It’s therefore important to keep HMRC notified of any changes so they can issue you with an up to date and accurate tax code as soon as possible. If HMRC provides you with anything other than a standard tax code, it is worth making sure you share the coding notice with your employer as this will ensure you are taxed correctly and don’t end up with a tax bill at the end of the year.
Why your PAYE changes throughout the year
Whilst your personal tax situation plays a big part in the variances in monthly salary, there are also some nuances in the HMRC system that will result in minor fluctuations. If the amount that the payroll changes each month is relatively small, to within a pound or two, it is because the automated tax tables HMRC uses to calculate income tax don’t use odd pennies, so monthly deductions do vary slightly. These variances are normally swept up by the end of the year ensuring that the correct amount of tax has been paid.