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If you find an employee’s tax is higher or lower than the previous month, you should check if the employee has had:
- A tax code change in the current or previous month
- A fluctuation in gross pay at any point from the beginning of the tax year
As long as an employee is not on a W1/M1 tax code, employee taxes are calculated cumulatively. Therefore, if an employee falls into either of the above categories since the beginning of the tax year, their tax liability will change.
Examples
An employee’s tax code changed from 719L to 1257L in August
This tax code change means the employee’s annual and year-to-date tax-free allowance has increased. Therefore, their tax will be adjusted to account for the overpayment from April to July. August’s PAYE liability is reduced and increased again in September, in line with the thresholds of the 1257L tax code.
An employee’s tax code has changed from 1257L in 719L in August
This tax code change means the employee’s annual and year-to-date tax-free allowance has decreased. Therefore, their tax will be adjusted to account for the underpayment from April to July. August’s PAYE liability is increased and reduced again in September, in line with the thresholds of the 719L tax code.
An employee has a gross addition/deduction in August
Since tax is calculated cumulatively, the calculation is based on the total earnings up to and including August minus the year-to-date tax-free allowance for the employee’s tax code. The tax due is the calculated year-to-date minus any tax already paid up to and including July.
FAQs
My employee has received a notice that their tax code has changed. Why is this not reflected in Bob Payroll UK?
Check that you have set up a connection with HMRC to be notified of updates.
Why has my employee’s tax code changed?
If your employee receives a P6/P9 Tax code change from HMRC, we are obligated to implement it. HMRC doesn’t notify us of the reasons for a tax code change. If your employee doesn’t agree with their new tax code, they should contact HMRC directly.
A new employee has provided their P45 after their first pay run. What tax code should I use?
If the P45 is from the current tax year, update the employee’s tax code details to match the P45. If HMRC have issued a code before the employee hands in the late P45, the HMRC tax code takes preference and should be used to update the employee’s details. To learn more, see Add a new hire FAQs.
How do I know if an employee has received a tax code notice?
In the payroll draft, the employee will have a Tax code update label under their name.