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Manual tax calculations

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Summary

Sage 50cloud Payroll and Instant Payroll both calculate your employee's tax automatically based on the information you enter into your software.

Description

There are a number of reasons why your employees tax might change, including the following:

  • Their pay is higher or lower than usual.
  • HMRC ask you to amend their tax code.
  • You add a starter form to their record.
  • You amend their year to date values.

If your employee's tax has changed but you're not sure why, you can perform a manual calculation to check it against your software.

Tip: For more information about why your employee's tax might change, please refer to the relevant article:

Resolution

Before you start to manually calculate your employee's tax, you might find it useful to print a copy of our tax calculation pro forma for your relevant Sage Payroll software.

L, P, T, V and Y tax codes
Step 1 - Obtain the correct information

To perform a manual tax calculation, you must note the following information:

Tip: If, for example, you're performing a calculation for week 45, you must note the values before you update week 45.

  Sage 50 Payroll Instant Payroll
Tax week/month Payroll > Change Process Date. Pay Employees > Check pay date.
Pay frequency Employee Record > Employment. Employee > Maintain existing employees > Payment Details.
Tax code Employee Record > Employment. Employee > Maintain existing employees > Employment Details.
Taxable gross pay to date Employee Record > Employment > YTD Values > Tax Year Values To Date > Gross Pay for Tax. Employee > Maintain year to date information > Gross Pay for Tax + Total Pay to Date.
Tax paid to date Employee Record > Employment > YTD Values > Tax Year Values To Date > Tax Paid. Employee > Maintain year to date information > Tax Paid + Total Tax to Date.
Taxable gross pay for the current period Enter Payments > Summary tab > Taxable Gross Pay. Pay Employees > Maintain employees' pay.
Step 2 - Calculate the pay adjustment to date
  • In the HMRC Pay Adjustment Tables helpbook, look up the employee's tax code in the relevant weekly or monthly table and note the Total pay adjustment to date.

    Note: If you pay the employee fortnightly or 4 weekly, use the pay adjustment for the end of the second or fourth week regardless of your process date. For example, for an employee you pay fortnightly with a process date in week 1, use the pay adjustment for week 2, then week 4 and so on. For an employee you pay 4 weekly, use the pay adjustment for week 4 then 8 and so on.

Examples:
  • An employee you pay weekly in week 45, with a tax code of 150L has a pay adjustment to date of 1305.90.
  • To check the pay adjustment for an employee in week 45 where their tax code is higher than 500, for example 750L:
    1 Deduct 500 from the tax code. 750 - 500 = 250
    2 Look up the resulting figure in the table. 250 = 2171.25
    3 Add this value to the value in the table marked * . 2171.25 + 4327.20 = 6498.45
    The pay adjustment to date is £6498.45.

  • If the tax code divides exactly into units of 500:

    • Look up the pay adjustment for one unit of 500, then
    • Multiply the value in the bottom right corner of the page in the Pay Adjustment Tables marked * by the remaining units of 500, then
    • Add the 2 figures together.

For example, to check the pay adjustment for an employee in week 45 with tax code 1500L:

1 Pay adjustment for 500. 4334.85
2 2 units of 500 remaining, 2 x the value marked *. 2 x 4327.20 = 8654.40
3 Add the 2 values together. 4334.85 + 8654.40 = 12989.25
    The pay adjustment to date is £12989.25.
Step 3 - Calculate the taxable pay to date

This is:

  • Taxable gross pay to date + taxable gross pay for the current period - pay adjustment.

Example:

1 Tax period Week 45
2 Tax code 1150L
3 Taxable gross pay to date 13200.00
4 Taxable gross pay for the current period 300.00
5 Total pay (3+4) 13500.00
6 Pay adjustment 10402.98
7 Taxable pay (5-6) 3097.02
Step 4 - Calculate the tax due to date

Once you've calculated the taxable pay, you need to choose which tax table to use to calculate the tax due. To check which table to use, refer to pages 2-4 in the HMRC helpbook Taxable Pay Tables Manual Method - Tables B to D.

  • Table B - Use this table if the employee's taxable pay is less than or equal to the figure in Column 1 for the relevant pay period.

    Ignoring the pence, look up the employee's pay in Table B. If the exact amount of taxable pay is not displayed, add together the figures for 2 or more entries.

Example:

1 Taxable gross pay to date 3097.02
2 Tax due to date Table B

3000 = 600.00
97 = 19.40

600.00 + 19.40 = 619.40

 

  • Tables C and D - If the employee's pay is greater than the figure in Column 1 for the relevant pay period, use these tables.

    1. In Table C1 for monthly or weekly, look up the pay period.
    2. Is the taxable gross pay to date more than the amount in Column 1 but not more than the amount in Column 2?
    3. If yes:

      1. Deduct the value in Column 1 from the taxable gross pay to date.
      2. Look up this value in Table D - Higher Rate (Tax at 40%), ignoring any pence.
      3. Add together the tax due at 40% from Table D and the value from Column 3 in Table C1.

    4. If no, use Table C2:

      1. Deduct the value in Column 4 from the taxable gross pay to date.
      2. Look up this value in Table D - Additional Rate (Tax at 45%), ignoring any pence.
      3. Add together the tax due at 45% from Table D and the value from Column 5 in Table C2.

EXAMPLE: 

An employee is paid weekly. It is week 45, the tax code is 1150L and the taxable gross pay to date is £35,000.00.

  1. Table C1 > week 45. Column 1 = 27693, Column 2 = 129808
  2. Taxable gross pay to date is 35,000.00, therefore it's between the two values. Continue to step 3.
  3. Yes, therefore:

    1. 35000.00 - 27693 = 7307.00
    2. 2920.00 + 2.80 = 2922.80
    3. 2922.80 + 5538.73 = 8461.53

An employee is paid monthly. It's month 4, the tax code is 50L and the taxable gross pay to date is £52,000.00.

  1. Table C1 > month 4. Column 1 = 10595, Column 2 = 50000.
  2. Taxable gross pay to date is 52000.00, therefore exceeds the value in Column 2. Continue to step 3.
  3. No, therefore:

    1. 52000.00 - 50000 = 2000.00
    2. 900.00 + 17866.66 = 18766.66

Step 5 - Calculate the tax due this period

Tax due to date, calculated in Step 4 minus Tax paid to date, noted in step 1 = tax due this period.

Example calculations

Example 1
1 Tax period Month 3
2 Tax code 550L
3 Tax paid to date 643.55
4 Taxable gross pay to date 4000.00
5 Taxable gross pay for the current period 2000.00
6 Total pay (4+5) 6000.00
7 Pay adjustment 1377.27
8 Taxable pay (6-7) 4622.73
9 Tax due to date 924.40 - Table B
10 Tax this period (9-3) 280.85
Example 2
1 Tax period Week 10
2 Tax code 543L
3 Tax paid to date 456.28
4 Taxable gross pay to date 3150.00
5 Taxable gross pay for the current period 350.00
6 Total pay (4+5) 3500.00
7 Pay adjustment 1046.10
8 Taxable pay (6-7) 2453.90
9 Tax due to date 490.60 - Table B
10 Tax this period (9-3) 34.32
Example 3
1 Tax period Month 8
2 Tax code 150L
3 Tax paid to date 4120.80
4 Taxable gross pay to date 23625.00
5 Taxable gross pay for the current period 3375.00
6 Total pay (4+5) 27000.00
7 Pay adjustment 1006.00
8 Taxable pay (6-7) 25994.00
9 Tax due to date 6130.93 - Tables C and D
10 Tax this period (9-3) 2010.13
Example 4
1 Tax period 43 - Paid fortnightly
2 Tax code 1150L
3 Tax paid to date 559.60
4 Taxable gross pay to date 11532.00
5 Taxable gross pay for the current period 562.00
6 Total pay (4+5) 12094.00
7 Pay adjustment 9517.62
8 Taxable pay (6-7) 2576.38
9 Tax due to date 515.20 - Table B
10 Tax this period (9-3) -44.40


Other tax codes
K codes

Tax codes which have a prefix of K are calculated by adding the pay adjustment to the taxable gross pay to date. This code is commonly used for employees who have company cars or have had other taxable benefits.

1 Tax period Month 3
2 Tax code K50
3 Tax paid to date 855.47
4 Taxable gross pay to date 4000.00
5 Taxable gross pay for the current period 2000.00
6 Total pay (4+5) 6000.00
7 Pay adjustment 127.26
8 Taxable pay (6+7) 6127.26
9 Tax due to date 1225.40 - Table B
10 Tax this period (9-3) 369.93

BR codes

BR stands for basic rate and tax is calculated on a cumulative basis at 20% with no free pay allowance.

BR codes always ignore the pence on the gross pay when calculating the tax, for example if the employee's taxable gross pay is £250.75, the tax due is £50 not £50.15.

D0 codes

For employees with a D0 code, tax is calculated at 40% with no free pay allowance.

D0 codes ignore the pence when calculating the tax, for example, if the employee's taxable gross is £2500.75 for the current period, the tax due is £1000, not £1000.30.

You can use Table D - Higher Rate to calculate the tax for a D0 code but do not take into account any free pay.

Ensure you enter D zero, rather than DO.


D1 codes

For employees with a D1 code, tax is calculated at 45% with no free pay allowance.

D1 codes ignore the pence when calculating the tax, for example, if the employee's taxable gross is £12500.75 for the current period, the tax due is £5625, not £5625.33.

You can use Table D - Additional Rate to calculate the tax for a D1 code but don't take into account any free pay.


0T codes

0T codes don't take into account any free pay allowance, but otherwise calculate tax as normal.

This should be entered as zero T instead of OT.

1 Tax period Week 10
2 Tax code 0T
3 Tax paid to date 648.34
4 Taxable gross pay to date 3150.00
5 Taxable gross pay for the current period 350.00
6 Total pay (4+5) 3500.00
7 Pay adjustment None
8 Tax due to date 700.00 - Table B
9 Tax this period (8-3) 51.66

Week 1 / Month 1 tax codes

If the week 1 / month 1 check box is selected when entering the tax code, tax is not calculated on a cumulative basis. It's calculated using the taxable pay for the current period using the free pay allowance for the first period of the current tax year. It does not take into account any previous pay.

Note: If the employee is paid fortnightly, the free pay allowance for week 2 is used. If they are paid 4 weekly, the free pay allowance for week 4 is used.

1 Tax period Month 3
2 Tax code 1100L Wk1/Mth1
3 Tax paid to date N/A
4 Taxable gross pay to date N/A
5 Taxable gross pay for the current period 2000.00
6 Total pay (4+5) 2000.00
7 Pay adjustment 917.43 (Month 1)
8 Taxable pay (6-7) 1082.57
9 Tax due to date 216.40 - Table B
10 Tax this period (9-3) 216.40

Week 53

If your processing date falls on the last day of the tax year, 5 April, you have a week 53. This only applies to weekly, fortnightly or 4 weekly paid employees. Tax in week 53 is calculated in the same way as a week 1 calculation. The week 1 pay adjustment is used and any previous pay and tax are ignored. Only the current period's pay and tax code are used in the calculation.

If your employee is paid fortnightly, the free pay allowance for week 2 is used. If they are paid 4 weekly, the free pay allowance for week 4 is used.

 

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