Payroll Net to Gross calculation

What am I doing wrong

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My client has an employee who earns £123K a year (+ commission). Tax Code 862T

Monthly Salary: £10,250

Net Pay:               £6,497.26

Year to Date upto month 9

YTD Gross:          £114.031

YTD Tax:               £37,208

We have to pay him an additional 30K Net Commission and need to work out the Gross for month 10.  Total Net pay should be £6,497.26 + £30,000.  Total £36,497.26

I make it we have £2250 of the 40% tax band left and £27,750 taxed at 45% tax band plus of course we need to  add 2% for Employee NI

Calculation

2250/0.58 =         £3,879

27,750/0.53 =     £52,358,49

Total:            =     £56,237

 

When I plug £56.237 into the payroll software I get a Net of £36,452.38

Difference of £44.88

I have been trying to work out this for ages hence the humble request for help and probably missing something very basic. I could play around the figures in the payroll based on trial and error to get my target figure but would like to know what I am doing wrong. Thank You.

 I have ignored the loss of personal allowance

Replies (7)

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By Duggimon
26th Jan 2018 09:51

You state you have £2250 left to be taxed at 40%. That's the gross figure. Then in your calculation you use that as the net figure for that band.

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By stephenkendrew
26th Jan 2018 10:16

I haven't checked the details of your calculation but I think you are overlooking the fact that the 40% threshold hasn't been fully used up to month 9.

The employee can earn £118,965 ((£8,620+150,000)x9/12) up to month 9 before they reach 45%. They have earned £114,031. The cumulative PAYE system means that the unused 40% rate of £4,934 (118,965-114,031) will be used in January as well as the £2,250.

More of the bonus will, therefore, be taxed at 40% rather than 45% than you have calculated.

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By GlobalTax
26th Jan 2018 10:27

Apologies I have amended the calculation only £44.88 difference but not sure why there should be any difference. Most of the Commission will go into 45% band

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By johngroganjga
26th Jan 2018 10:51

Why is the employer here underwriting the employee’s tax liability? Why don’t they keep things simple and pay him an agreed gross amount and leave the tax to him and HMRC, as they apparently do with his much larger salary?

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Replying to johngroganjga:
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By GlobalTax
26th Jan 2018 11:20

I have absolutely no idea. They just asked me for the Net Amount. The head office is based overseas.

It makes it tricky with the loss of personal allowance to work out the Net as the employee could later come back saying the calculation should be based on excluding the PA

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By bernard michael
26th Jan 2018 11:18

Why are you ignoring the restriction of the personal allowance?
How will you react if you pay him the net payment now and he ends up with a tax liability at the end of the year. Will you pay the tax?

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Replying to bernard michael:
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By GlobalTax
26th Jan 2018 13:12

The problem is I do know the rationale why they are giving the 30K nor do I want to ask them.

I may give them two calculations one with the personal allowance and one without.

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