Hi
I've had to take over the payroll of a small company but I don't yet have any software so am completing the P11 Deduction sheets manually.
I have an employee with the PAYE code 237T (M1 basis).
Their gross pay is £3,700 and in previous months they have paid £777.06 tax.
I would like to understand how the £777.06 was calculated.
My understanding of the process is that I would look up the tax free amount under 237 in month 1 in the Pay Adjustment Tables provided by HMRC (Table A). This is £198.25.
£3,700 - £198.25 = £3,501.75 taxable pay, therefore £700.20 PAYE.
I then thought, maybe I'm supposed to add on the £198.25 which would make £3,898.25 taxable, therefore £779.60 PAYE.
Neither of these amount to the PAYE he has paid in previous months (Has taken £3700 each month).
I put the amount in a wages calculator online, and the figure came out at £777 so I must have misunderstood how to calculate the wages when an employee has a T code.
I have done a manual payroll course, but T codes didn't seem to appear in the syllabus! (Useful eh!)
Can anyone shed some light?
Replies (5)
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Some tax is due at 40%
I know it is a m1 code, but take £3,700 x 12 = £44,400
subtract 2375 gives taxable pay of £42025.
On an annual basis this would be taxed £4625 at 40% and £37400 at 20%, total £9330.
Divide by 12 gives £777.50
This does not agree exactly to the tables due to rounding.
The "T" in the code doesn't signify anything important in the calculation of the monthly payroll - I can't remember what it means - does it mean there are BIKs in the code? Anyway, for calculation purposes it may as well be an L code (although it won't increase automatcially at the end of the year like an L code does).
To put it another way
You are correct to deduct the £198.25 (Month 1 free pay for code 237) to arrive at taxable pay of £3,501.75, but only £3,117 (the basic rate band of £37,400 / 12) of that is taxable at 20% with the rest at 40%. You need to look up Tables B & C if you are doing it manually, but the calculations are:
£3,117 @ 20% = £623.40 plus £384 @ 40% = £153.60 gives a total of £777.00.
The exact % figure given by software is indeed £777.06.
[Edit] Overtaken by events! You have already worked it out!
T suffix
The T suffix is used for one of two reasons;
1) the employee does not want the employer to know of their personal circumstances (an L suffix for example denotes you are under 65 and a P suffix shows you are over 65!)
2) It is applied by the tax office when an allowance or deduction in the code number that fluctuates needs to be manually checked by HMRC - the T suffix ensures details are generated onto a worklist for HMRC clerical staff to check at the end of the tax year.