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A silly one maybe...

For payroll purposes, can someone please confirm whether the 40% band is applied proportionally over the year or is it applied cumulatively such that net pay will suddenly change from one month to the other once the 40% band is breached? Many thanks in advance.

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By Old Greying Accountant
20th Dec 2012 16:40

Depends ...

If on a cummulative tax code, it is spread, soo you get 1/12 or 1/52 of the band each month/week. If pay is the same each month and on a month 1 basis it will be much the same.

However, if they are a director, the directors NI rules mean they will have no/low NI for the first few weeks/months and then it will gradually increase and then plateau. Basically, the earnings to date are divided by twelve, the monthly Ni calculated, multiplied by the number of months in, and then the Ni paid to date is deducted to leave the current months liabiliy. If a director is on a flat salary they can opt for standard NI treatment, but if they have a bonus they will have to switch to the directors method to ensure they do not underpay for the year.

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By charlb
20th Dec 2012 14:43

Thanks a lot old and grey, though I am still a bit confused by what the payroll software is throwing out as the employee in question is not a director, is not paid on a month 1 basis however their gross pay has differed month on month due to entitlement of shift premiums, bonuses etc and now they have posed the question as to why if their gross pay is more this month, their net pay is less. I know it's to do with the 40% band however I don't want to say "that's the way the software works it out" without understanding a bit more about how the software works it out as I would have expected an even "spread" that you refer to above. Is it due to the fact that where there is a big difference in monthly payments (for example September gross was about 1/8th of December gross) the results become a bit skewed?

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20th Dec 2012 15:05

Payroll software supplier?

Can't you phone technical support and ask them to explain?

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By ACDWebb
20th Dec 2012 15:15

It's the way culmulative works.

If you had a big bonus in month 2 that might push a large part into the higher rate that might not be due looking at the full personal allowance and BR band due for the year, but it will unwind itself as the year progresses and should end up correct at month 12 (assuming an unchanged culmulative PAYE code throughout the year)

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20th Dec 2012 15:36

If 40% band isn't the normal marginal rate, yet in a specific pay period a large bonus or exceptional earnings amount is processed the expectation is that the payroll will, on a cumulative basis determine that at that stage the taxpayer is in the 40% marginal band and deduct the additional tas as appropriate. Should subsequent periods readjust the cumulative taxable pay to below the cumulative 40% threshold then the additional tax paid will start to be rebated back.

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By Old Greying Accountant
21st Dec 2012 14:50

If gross goes up, so should net ...

... I can't see why £100 extra gross income should reduce the take home, even if there was a large bonus the previous month! The only time I can think this would happen was if there was a downward change in tax code, possible if P11d benefits have increased, although normally you would then be switched to a month 1 code and the earlier months would be collected the following tax year.

If uncertain on payroll, I always work it out manually on a spreadsheet to put my mind at rest.

It is not hard, the detail you need are here

http://www.hmrc.gov.uk/paye/rates-thresholds.htm#1 

 

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More gross pay should never be less net

Agreed, everything else being equal more gross pay should never result in less net pay. (except on a weekly payroll in week 53, when special rules apply, and in certain director's NI situations where NI may swing into play when there was none in previous months)

This HMRC page can be used to verify the PAYE results:

 

 

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