Suppose you are an employee of a company. Your owner or employer takes income tax on your salary and national insurance contributions (NIC) before paying you. It is the responsibility of your employer to send the Tax and NIC to HR revenue & Customer (HMRC). This system is known as pay as you earn (PAYE). So, it’s very important for you to work out on your income tax. It would be best if you learned how to calculate the tax on your salary so that you can verify your employer is deducting the right amount of tax on your salary and not deducting an extra amount.
Before calculating income tax on your salary, you need to get familiar with a few systems first.
What is PAYE?
PAYE stands for pay as you earn; it is a system based on paying income tax on employee income. It is considered the backbone of employee taxation and also considered an important factor when working out your overall tax position. You need to understand a little more about it.
What PAYE does is it spreads your NIC and Tax over the tax year, rather than paying the tax in one lump sum payment.
How does your employer collect tax on your salary?
Your employer collects the tax on your salary with the help of the code number, and this code is provided by the HMRC directly to your employer, whereas a copy code and how the tax is being calculated is sent to you.
On each payday, it is your employer’s responsibility to give you a payslip based on salary and deducted tax. At the end of every tax, you will get form P60 which describes the total amount paid to you and the deducted amount from you for the last tax year (your employer must give it to you by 31 May following the tax end-year date).
What is a tax rebate?
For those who do not know much about income tax. For them, there is one term which is tax rebate. It is an amount (tax refund) you claim from HMRC if you have paid too much tax and or when the tax liability is less than the taxes the individual has already paid. Generally, HMRC pays off the extra amount paid by an individual automatically within 5 working days. But if it does not happen then you should for the claim. If you think you have paid extra tax than usual then go google and find some Tax Rebate Calculator, they can tell you the exact extra amount you paid.
How should I work out my tax?
Always remember, tax year starts from 6 April to next year 5 April, it is the time period of one year, for example, if we talk about tax year current year, then it will be started from 6, April 2022 to 5, April 2023.The ways to calculate the income tax on your salary are as follows:
You need to identify the components that sum up together to arrive at a total income, what are the components?
· Employee income
· Pension income
· Social security income
· These are known as components.
you need to deduct all the reliefs from the components due, sum up the remaining balance which arrives on your net income
Now, deduct all any allowances which are due to arrive on the amount, on the basis of which income tax is being charged.
After completing step 3, now calculate the tax on the remaining components amount.
Now add tax together which is due on each component calculated at step 4.
Deduct from the amount which is calculated at step 5, any tax reduction for which to taxpayers person is entitled for the next year. Where any tax reductions are found, they reduce the tax liabilities that were calculated above.
Think of any further amount of tax is due add it, addition of tax amount which is left after step 6. For which the taxpayer is liable for the next tax year, under the listed provision in relation to taxpayers in section 30.