Aug 6, 2023

The correct way to calculate PAYE tax on monthly or weekly salary

Our previous article about the correct way to calculate personal allowance explained that free pay is not just the yearly value divided by 12 or 52 when the employer pay schedule is monthly or weekly. The formula is an algorithm replicating the paper-based conversion tables.

Calculating PAYE tax on monthly or weekly salaries is not as complicated as getting the allowance amount. Still, there are also some hidden rules that you must know to understand the PAYE tax your payroll software will calculate.

In this article, we assume you have already come up with the employee's personal allowance.

We recommend check your calculations using our take-home pay calculator at the bottom of this article.

Rounding rules

Before discussing detailed explanations, it's essential to clarify how HMRC handles decimals. Not applying them can lead to 0.01 or 0.02 discrepancies in results.

Results from intermediate steps for calculating PAYE tax shouldn't be rounded. Instead, take the calculations for all tax formulae to 4 decimal places of a pound without correcting the final place.

When adding up all the tax bands, the final calculation step requires rounding the result to the nearest 1p below.

How to accurately calculate personal allowance

Read more

Converting annual thresholds into monthly or weekly ones

If you go to the HMRC website to find the PAYE thresholds and rates, you'll find tables with values for annual, monthly and weekly schedules. Weirdly, you should be careful with these values as they are incorrect if you use them to compute your employee PAYE tax based on a monthly or weekly salary. HMRC simplified these values to make them more practical.

In fact, you should always divide the annual value by the period number to find the threshold values, which should be truncated to the fourth decimal place.

As a general rule, when HMRC asks to round to the nearest 1p, it means that you should round down if the third decimal is between 0 and 5 and round up if it's 6 or more. For example, HMRC would round £67.5568 up to 67.56 and round 67.5558 down to 67.55.

Here are the actual thresholds and rates(2024-25):

Region Rate Type Rate Annual Range (£) Monthly Range (£) Weekly Range (£)
Lower Limit Upper Limit Lower Limit Upper Limit Lower Limit Upper Limit
England, Wales and Northern Ireland Basic rate 20% 0 37,700 0 3,141.6666 0 725
England, Wales and Northern Ireland Higher rate 40% 37,700 125,140 3,141.6666 10,428.3333 725 2,406.5384
England, Wales and Northern Ireland Additional rate 45% 125,140 10,428.3333 2,406.5384
Scotland Starter rate 19% 0 2,306 0 192.1666 0 44.3461
Scotland Basic rate 20% 2,306 13,991 192.1666 1,165.9166 44.3461 269.0576
Scotland Intermediate rate 21% 13,991 31,092 1,165.9166 2,591 269.0576 597.9230
Scotland Higher rate 42% 31,092 62,430 2,591 5,202.5000 597.9230 1,200.5769
Scotland Additional rate 45% 125,140 10,428.3333 2,406.5384

Step 1 - Comparing the taxable salary with the earning thresholds

The first step in applying the correct tax rate to taxable pay is to check which threshold the taxable income falls under. This is a straightforward comparison between the pay amount and the bands. If you are unsure how to get the correct taxable pay, check our previous handout about the proper way to calculate personal allowance.

Example for month #1

For instance, let's check which band a given monthly taxable pay of £2,000.00 for someone working in Scotland would fall in for the first month of the 2024 tax year.

As per the table below, the first three monthly thresholds for month 1 are 192.1666 (starter threshold), 1165.9166 (basic threshold) and 2591 (intermediate threshold). So, our salary falls between the basic and intermediate thresholds.

Example for month #2

The above example is very straightforward. However, you can't assume it's right for subsequent months or weeks (or fortnights, four weeks, and so on) as you have to account for period numbers. Let's make it concrete. Suppose you want to know what rate to apply for the employee from our first example.

The first three thresholds are 384.3333, 2331.8333, and 5182, and the base salary is £4,000.

It doesn't seem to be a big difference. But the problem is that you can carry tiny decimal errors throughout the tax year if you don't work that way.

Step 2 - Calculate the amount of tax per threshold

To understand the concept of cumulative bands better, imagine a measuring jug with lines corresponding to the thresholds. In this analogy, the water you pour into the glasses is the taxable pay.

When the water goes above a measure, you have used the entire threshold. When no water is left, you must measure the difference between the water level and the first line underneath.

Example for month #1

Let's use the example from Step 1 to make this clearer.

Our Scottish employee's taxable pay is 2000 for the first month of the 2024 tax year, assuming the gross salary minus their monthly allowance is an integer. It's very unlikely, but whole numbers are more intuitive.

PAYE tax on the first threshold = 192.1666 * 19%
PAYE tax on the first threshold = 36.5116

PAYE tax on the second threshold = 1165.9166 * 20%
PAYE tax on the second threshold = 233.1833

PAYE tax on the third threshold = (2000 - 1165.9166) * 21%
PAYE tax on the third threshold = 175.1575

Notice that because the taxable pay is below the third threshold value of 2591, therefore, we must subtract 2000 from the previous threshold limit to get the taxable amount.

Example for month #2

In month #2, our Scottish employee's taxable pay is 4000.

PAYE tax on the first threshold = 384.3333 * 19%
PAYE tax on the first threshold = 73.0233

PAYE tax on the second threshold = 2331.8333 * 20%
PAYE tax on the second threshold = 466.3666

PAYE tax on the third threshold = (4000 - 2331.8333) * 21%
PAYE tax on the third threshold = 350.3150

Step 3 - Calculate the tax for the current period

This is the most intuitive step of all. To get the PAYE tax of any given salary, you must add it all up.

PAYE tax = PAYE tax threshold 1 + PAYE tax threshold 2 + PAYE tax threshold 3 + PAYE tax threshold n

Example for month #1

From the example from step 2, it would work like this:

PAYE tax = 36.5116 + 233.1833 + 175.1575
PAYE tax (before rounding) = 444.4919
PAYE tax (after rounding to the nearest 1p below) = 444.49

Example for month #2

PAYE tax = 73.0233 + 466.3666 + 350.3150
PAYE tax (before rounding) = 889.7049
PAYE tax (after rounding to the nearest 1p below) = 889.70

Notice that the result for month 2 is not twice the result for month 1. This is a demonstration of the usual misconception on how to calculate PAYE tax. It's frequently assumed, including by some reputable accountants, that using the thresholds listed on HMRC's website is sufficient to calculate PAYE tax.

Step 4 - Calculate tax deduction or refund

The calculation done in step 3 is insufficient to precisely know how much PAYE tax the employee will pay for a given period. Indeed, an additional step is required to ensure the result will be correct even if the employee's tax code or salary has changed, as well as the legislation.

In this final step, you will subtract the PAYE tax due to date from step 3 with the PAYE tax from the previous month. For the first pay period of the tax year, it's pretty straightforward: you subtract the tax due to date for the current period from zero, as no taxes were due to date. In our above example, the PAYE tax deduction would be 444.49 - 0 = 444.49.

However, suppose that in month 2, the employee tax code has been changed to NT. Not only the employee tax for the period will be zero, but HMRC must refund the tax previously paid from the first month. In this case, the tax calculation would be 0 - 444.49 = -444.49. This amount will be added to the employee's take-home pay and refunded to the employer by HMRC.

Check your results

You can use our below calculator to check your results. However, beware that you can only do it on a non-cumulative basis. Only our comprehensive software can help you running multiple successive payroll to check the results for subsequent periods.

Give us a shot.

Choose Moonworkers online payroll services for professional, reliable, and knowledgeable service.
We have been using Moonworkers for quite some time and compared to other software in the market, we found it very simple to use and excellent. Moreover, the customer service is great.
Shabir D.

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