How to work out PAYE tax

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If you’re an employee, you’ll probably have tax taken out of your pay before you receive it. This is called PAYE – Pay As You Earn.

You can work out how much tax you should pay by using this PAYE tax calculator.

If you’re self-employed, or receive other income like a part-time job, investment or property income, you’ll need to know how to work out PAYE Tax and how much tax to pay on those earnings.

Pay As You Earn (PAYE) is a tax system HM Revenue and Customs (HMRC) uses to collect Income Tax and National Insurance from employment.

Employers are responsible for deducting tax and National Insurance Contributions (NICs) from their employees’ pay and paying it to HMRC.

There are different ways employers can work out how much tax and NICs to take from their employees’ pay, depending on the information they have about them. The tax year runs from 6 April one year to 5 April the next.

You work out your PAYE tax in one of two ways depending on whether you already have a tax code:

  • If you don’t have a tax code, you can use the PAYE calculator to work out how much tax to pay
  • If you’ve been given a tax code and want to know how it’s worked out, follow steps 1 to 5 below

To work out how much PAYE tax to take from each pay packet:

  • Multiply your gross pay by 12 and divide by 52 (or multiply your gross pay by 260 and divide by 365 if you’re paid weekly)
  • Subtract the tax-free amount for the year for someone on your income level .Subtract any secondary income not taxed at source.
  • Divide this amount by the number of pay periods in the year. This is either 26 or 12 if you’re paid fortnightly or monthly respectively.

To work out PAYE tax, you need to know the total amount of your earnings. This is inclusive of all the money that you receive. The amount of money you receive for PAYE tax purposes is known as your assessable income.

Your assessable income includes:

– Salary and wages, including overtime, bonuses and allowances

– Commission

– Taxable fringe benefits (for example a subsidized car from your employer)

– Director’s fees

– Income from trusts, partnerships and other entities

– Any business or investment income (net of expenses) from which you have received an ABN statement or if you are a sole trader and you do not have an ABN, then gross income arises.