Calculate How Much PAYE Should I Pay in 2024

Income tax may be a necessary aspect of adult life, but navigating the PAYE system can sometimes seem like it could be more apparent. However, understanding how much you should pay can be a manageable task. The PAYE system ensures taxes are deducted directly from your income, simplifying the process but often leaving individuals uncertain about their actual tax liabilities. 

This blog will help you understand the basics of the PAYE system, income tax bands, and pension taxation and rectify any discrepancies in your tax payment. With this knowledge, you can calculate your obligations accurately, avoid overpayments, and take control of your financial well-being. So, let’s begin!

What is PAYE, and What is its Purpose?

‘Pay As You Earn’ or PAYE signifies the process by which income tax gets deducted from your wages before you receive it. In essence, it’s a method of collecting tax at source by your employer and remitting it to the HMRC on your behalf, enabling instant employee payslips for easier tracking. It was introduced back in 1944 to streamline the collection of tax revenues.

The purpose of PAYE is to spread out the payment of an employee’s tax evenly throughout the tax year. The system works to prevent under or over-payment of tax. PAYE ensures that your allowance, which you can earn tax-free each year (£12,570 for 2024/25), gets evenly allocated over all your paydays for a particular tax year, ensuring everything runs smoothly and efficiently.

How PAYE Works?

The PAYE process commences once you start work. At this point, you must furnish your new employer with a P45 form from your previous employer or, in the case of your first job, complete the HMRC’s new starter checklist. This essential HMRC’s new starter checklist information aids the creation of your tax code, which instructs your employer how much tax needs to be deducted from your pay during the PAYE process. 

There are additional things to take care of which we shall learn in the following sections.

1. Income Tax Bands

A person’s total income determines their ‘tax band.’ The rates for Income Tax bands for the 2024/25 tax year are as follows:

These rates mean that, for the 2024-25 tax year, you don’t pay tax on the first £12,570 earned. Beyond this, how much tax you pay depends on which bands your earnings fall into.

2. National Insurance Contributions

Besides paying income tax, employed individuals make National Insurance Contributions (NICs) as part of the PAYE system. The rates for Class 1** NICs**, effective from January 2024, are as follows:

On top of this, employers also make a secondary contribution of 13.8% on earnings above a certain amount.

3. Calculating PAYE

The amount of PAYE you should pay is calculated based on your salary and your eligibility for personal allowance. PAYE due dates are important to consider. PAYE can be figured out either manually or using an online tax calculator or during your online tax return preparation. 

However, remember that the calculation may not be 100% accurate due to the number of factors and numerous variables it includes, such as your tax code and whether you make any pension contributions or student loan repayments.

Here’s how you can roughly work it out:

1. Find your tax-free personal allowance.
2. Deduct this from your salary to find taxable income.
3. Apply the appropriate tax rate(s) on your taxable income to find the total tax due.

What Is PAYE for Different Employment Statuses?

The type of employment status you hold plays a significant role in determining how much PAYE you need to pay. The general categories include full-time employees, part-time employees, and contractors or freelancers.

1. Full-time employees

For full-time employees, PAYE gets deducted automatically by the employer each time the employee is paid. The amount deducted depends on the employee’s tax code and income over a tax year.

2. Part-time employees

Just like full-time employees, part-time employees also pay PAYE. The only difference is that the amount payable would be lesser due to lower wages. It’s crucial to ensure you’re using the correct tax code to calculate your PAYE accurately.

3. Contractors and freelancers

For contractors and freelancers, the PAYE process is a little different. They need to determine their PAYE using a self-assessment tax return, generally paying tax once or twice a year. Most self-employed individuals won’t pay PAYE unless they decide to pay themselves through their own limited companies via a self-assessment tax return, which is essential for their financial management.

What Is PAYE on Pensions?

PAYE isn’t exclusive to employees; it extends to people who draw income from a pension, i.e; pension income. The pensions received are paid net or after the relevant amount of tax has been deducted. If you have more than one pension, the HMRC will ask one provider to make all the deductions for your state pension payments. Let’s discuss this in the following sections.

1. Pension contributions and tax relief

The government gives tax relief on pension contributions to encourage saving for retirement. The relief you get is generally the same rate as the income tax you pay regarding the percentage of your earnings. This means you can claim back the tax you’ve paid on all contributions if your pension scheme isn’t set up for automatic relief or your employer takes more than the correct amount.

2. Work pension and state pension taxes

Regarding work and state pensions, the pension provider collects any tax owed and dispatches it to HMRC on your behalf. They also deduct any tax due on state pensions. If you continue to work while receiving a pension, your employer will deduct the requisite PAYE from your earnings and on all forms of your income, including the state pension you receive.

How much PAYE should you pay?

Without considering personal circumstances and tax code adjustments, the amount of PAYE you should pay can be surmised as such:

1. 0% on earnings up to £12,570
2. 20% on anything between £12,571 – £50,270
3. 40% on earnings between £50,271 – £125,140
4. 45% on anything earned over £125,140

If you’re apprehensive about paying the incorrect amount, HMRC can assist you in checking your tax and National Insurance contributions.

How much can you earn before you need to pay income tax?

As we’ve already covered, the amount of tax payable depends on your income slab. For your reference, to better understand the PAYE, the 2023 – 2024 tax year was:

1. You pay 0% on earnings up to £12,570
2. 20% on anything between £12,571 – £50,270
3. 40% on earnings between £50,271 – £125,140
4. 45% on anything you earn over £125,140

These figures outline the UK’s marginal tax rates, implying that different portions of your income are taxed at varying rates.

How much can you earn before you need to pay National Insurance?

Your National Insurance contribution, or NIC, is determined by how much you earn per week. For the 2023–2024 tax year, it was:

1. You would pay National Insurance if you earn more than £241 per week
2. You would pay 10% of your earnings that lie above this limit and up to £967 per week
3. Anything earned beyond £967 per week sees the rate drop to 2%

How is PAYE worked out?

If your total income for the tax year goes beyond the personal allowance pay cap (set at £12,570 for 2024), as a general rule of thumb, you’ll typically be charged at rates of 20 per cent, 40 per cent, or 45 per cent, depending on the income bracket you fall under, under the UK PAYE system. 

If your only income exceeds this threshold, the amount of PAYE is usually divided into equal payments over the year. If you notice discrepancies in these payments, HMRC should be your first point of contact.

How to Check if You Paid the Correct Amount of PAYE?

Checking the correctness of your PAYE payments is essential to avoid either underpaid or overpaid tax situations. Your payslips and annual P60 can assist in tallying your earnings and the amount of tax you have paid during the tax year.

1. Overpaid or underpaid tax situations

Overpaid or underpaid tax situations might arise due to reasons like changing jobs partway through the year, having more than one source of income, or being on emergency tax codes. In such situations, it’s recommended you contact HMRC directly. They will adjust your tax codes so you may automatically pay the correct amount moving forward.

2. Process for rectifying incorrect tax payments

The process for rectifying incorrect tax payments begins with identifying the discrepancy. HMRC will usually rectify the situation by changing your tax code or issuing a P800 income tax calculation. This should help you determine if you’ve overpaid or underpaid, giving you 4 years from the end of the relevant tax year to claim a refund or pay any due amount.

How is PAYE paid?

PAYE payments can be made using several methods to suit different preferences. These include Direct Debit for automatic and regular deductions, BACS (Bankers’ Automated Clearing Services) for standard bank transfers, and CHAPS (Clearing House Automated Payment System) for same-day transfers, typically used for urgent payments. 

You can also pay directly at your bank or building society by providing the appropriate payment reference number to ensure the funds are allocated correctly to your tax account.

In some cases, HMRC may adjust your tax code to collect unpaid taxes, effectively recovering the amount through PAYE deductions from your salary or pension. However, this option is only applicable under specific conditions, such as when the owed amount is below a certain threshold.

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Conclusion

Understanding the Easy PAYE (Pay-As-You-Earn) system can make managing your income and taxes far less daunting. Whether you’re an employee, self-employed, or receiving a pension, PAYE provides a streamlined framework to calculate and pay income tax and National Insurance contributions directly from your earnings. This system ensures that your tax obligations are met without requiring manual intervention, reducing the chances of errors or missed payments.

Being knowledgeable about PAYE also helps you stay on top of your finances. You can ensure that your deductions are accurate, identify potential overpayments, and maintain compliance with tax regulations. With a clear understanding of PAYE, you can better plan for your financial future.

Frequently Asked Questions

Is everyone automatically enrolled in PAYE?

No, not everyone is automatically enrolled in PAYE. Only employees who pay tax and National Insurance each month through their employer are automatically enrolled.

What should I do if I believe I have paid too much PAYE Tax?

If you think you have paid enough PAYE tax, you can check if you’re due for a tax refund or a tax bill at the government’s website. If you qualify for a tax refund, you’re required to contact HMRC.

How can I check my PAYE code?

Your current PAYE code will be displayed on your payslip. If you still need to get your payslips, you can contact your employer’s payroll department or ask HMRC, who can provide you with your current tax code.

Do I still need to file a tax return if I pay PAYE?

Yes, you may still need to file a tax return even if you’re paying PAYE. This usually applies if you have additional earnings that haven’t been taxed.

What are the consequences of not paying PAYE on time?

Late payment of PAYE can result in penalties and interest charges from HMRC. To avoid this, it is always beneficial to be on top of your tax responsibilities.

How do I calculate my income tax and National Insurance (NI) contributions for the current tax year if I have a new job?

To estimate how much income tax you owe, use your total income, deduct allowances (like the personal allowance), and apply income tax rates for the current year. For self-employed individuals or additional income, file a self-assessment tax return to calculate taxes and NI contributions accurately.