Introduction to Income Tax and NICs Pay As You Earn and income tax
5.8
Cumulative and non-cumulative operation of PAYE
5.8.1 Cumulative operation
A person’s tax liability is based on their total taxable income during the whole tax year. For that reason, PAYE normally operates on a cumulative basis.
This means that in each pay period:
• Tax due is calculated on the total taxable earnings in the tax year to date
• Any personal tax allowances are apportioned over the tax year
• Tax charged that period is the difference between the total tax due and the tax paid to date.
(Note that a P6 notification from HMRC can include taxable earnings to date and tax paid to date figures that would replace the figures already in the payroll system.) The cumulative system is, to some extent, self-regulating. An under-deduction in one period will be collected, or a refund due will be generated, in a later period. This is useful when a change in tax code is processed, particularly if it has a retrospective effect. The cumulative nature of the calculation will ensure that full retrospection to the beginning of the tax year applies automatically as soon as the new code is used.
5.8.2 Non-cumulative operation
HMRC may sometimes issue a notice of coding to be applied on a non-cumulative or ‘ Week 1 / Month 1’ basis. In this case, the employee’s tax is calculated by reference to the current tax period only. Previous earnings and tax paid in the current tax year are ignored. The tax code is always looked-up in the pay adjustment table for Week 1 or Month 1, as appropriate. For example, if a two-weekly or four-weekly payroll is being processed, then use the tax code for the appropriate week: Week 2 or Week 4. HMRC sometimes issues a non- cumulative tax code when an individual’s personal tax allowance is significantly reduced (the numeric part of the tax code is much lower than in the previous tax code). Operating the new tax code on a cumulative basis could result in a large tax underpayment being deducted in that pay period and lead to possible hardship for the tax payer. By applying the tax code on a Week 1 / Month 1 basis, the tax code is applied from that pay period only without collecting any underpayment earlier in the tax year is collected. (See also 5.9.3 ‘Operation of the regulatory limit’.)
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