What are the PAYE Tax Rates and Thresholds for Tax Year 2016/17?
As an employer, you probably use PAYE to ensure that your employees are paying the correct income taxes. And in most cases, your payroll software will work this out for you automatically – so most employers don’t need to worry too much about doing manual calculations.
However, it always helps to understand how the tax system works. So to help you understand how PAYE tax rates and thresholds will work for the tax year 2016-2017, here’s a quick-reference guide, along with a few examples to show you how it works in practice.
Please note that this only covers Income Tax, and not National Insurance.
Personal Allowance Threshold
And employee’s personal allowance is the amount they are allowed to earn before any tax is taken from their wage.
Example: Anna starts a part-time job as a Junior Marketing Officer with a large company. She works 25 hours a week at an hourly rate of £7.25. Her total pay for the week is £181.25 – this is lower than the Personal Allowance Threshold, and therefore Anna does not have to pay any income tax.
Basic Tax Rate
The Basic Tax Rate is the first bracket you hit after exceeding your Personal Allowance Threshold.
The amount taken at the Basic Tax Rate is 20%, and the threshold is £32,000 per year. Anything an employee earns that is over the Personal Allowance Threshold of £11,000, and within the Basic Tax Rate Threshold of up to £32,000, is charged at 20%.
Example: Anna is offered a full-time job as a Marketing Officer with the same company. This gives her an annual salary of £26,000. She does not have to pay any tax on her first £11,000, but the remaining £15,000 is charged at the Basic Tax Rate of 20% – a total value of £3,000 over the full year.
Higher Tax Rate
After hitting the Basic Tax Rate threshold, further earnings are charged at the Higher Tax Rate.
This tax rate is charged at 40%, and applies to all earnings above £32,000, up to and including £150,000.
Example: Anna has worked her way up to the position of Head of Marketing, which gives her a very nice salary of £65,000. She still pays no income tax on her first £11,000, however she pays 20% tax on her first £21,000 (a total sum of £4,200), and 40% tax on the remaining £33,000 (a total sum of £13,200). The income tax she pays for the full year comes to a total of £17,400.
Additional Tax Rate
This is the final tax bracket, and comes into force once the Higher Tax Rate threshold has been reached.
The Additional Tax Rate is charged at 45% of annual earnings above £150,000.
Example: Anna has been with her company for many, many years, and has been offered a place on the Executive Board to take over from the now-retired Creative Director. She enjoys a very healthy salary of £175,000. She still earns £11,000 tax-free, and she still pays £4,200 at the Basic Tax Rate. However, she now pays a 40% Higher Tax Rate on £118,000 of her salary (a total of £47,200), and a further 45% on the remaining £25,000 (a total of £11,250), bringing her total income tax contribution for the full year to £62,650.
For more information on tax brackets, thresholds, and for advice on National Insurance, visit the Government’s official help page here.
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