An amount in respect of each employee's tax liability has to be deducted by the employer from each payment of wages or salary. This is called the pay-as-you-earn system (PAYE).

In order to ensure that the PAYE deductions are correct it is up to each employee to inform the Inspector of Taxes for the district in which the employer's business is situated what allowances and reliefs he or she is entitled to. The proper way of doing this is to fill in a return of income form and send it to the Inspector. At the end of each tax year the employer himself has to inform the Inspector of the amounts he has paid to each employee and so, if you have no other income and the only allowance you are entitled to is the allowance for a single person, the correct deductions will continue to be made from your pay anyway, so you may not need to do anything. But if the Inspector should send you an income tax return form you must fill it in, sign it and send it back.

The Inspector of Taxes works out, from the information he has been supplied with, a 'tax code'. He sends to you a Notice of Coding, showing how the code has been calculated and this gives you an opportunity for checking that the coding is correct. The code consists of a number and a letter. The number is the total of all your allowances with the last digit omitted. The Inspector also informs your employer of your code number, but not how it has been arrived at, since that is confidential. From the code your employer knows precisely how much he must deduct from each payment of your wages to ensure that, by the end of the tax year, you will have paid in tax just about as much as you ought to have done. The employer, of course, hands over to the Inland Revenue all the money he collects under PAYE.

Taxation Example B

James Howard is a widower living alone but employing a housekeeper. His income consists of the state basic pension (no earnings-related pension), an occupational pension of £2,000 a year, and gross income from UK investments, none of which is tax exempt, of £7,200. He pays £730 a year in mortgage interest.


In the summer of 2012 he estimates his tax liability for the current year as follows, ignoring the fact that the rate of basic state pension will rise in November and using the existing figure of £23.20 per week. Check his calculations.

State pension 1,206Taxation Example B

Personal And Business Finance 2018

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