Income tax for employees
Changes in your tax situation
By Joe Elvin
Article 3 of 9
Changes in your tax situation
Learn about events that can change your tax bill, and what you need to do to pay the right tax.
When your financial situation changes - you receive a pay rise or a bonus, for instance - your tax affairs are usually taken care of automatically.
However, there are key moments when you need to be particularly alert to make sure that HMRC has the right information - and, crucially, doesn’t charge you too much tax.
Here, we explore the scenarios when your tax situation is most likely to change and explain what actions to take.
- Get a head start on your 2016-17 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.
Your first job
When you first start work, your employer should give you a starter form to complete. This is sent to HMRC, which uses it to calculate your tax code and ensure the correct tax is deducted from your pay.
Until this happens, your employer will normally use an emergency tax code, based on the standard personal allowance (£11,500 in 2017-18).
If you start work at any time other than at the beginning of a new tax year, the emergency code may cause you to pay too much tax or too little. This should be refunded when the correct code is applied.
Find out more: emergency tax code explained - how much you'll pay
Tax on temporary or seasonal jobs
If you earn more than £221 a week or £958 a month, it's likely you'll have income tax deducted from your wages via PAYE.
Sometimes tax can be deducted even if you earn less. This might happen if you work sporadically or in a seasonal job - your monthly wages might make it seem like you're going to earn more than £11,500, but then you may have a period with no income at all.
If this happens, you'll probably be due a tax rebate at the end of the tax year.
The same may apply to those who leave their job in the middle of a tax year and stop working in the UK thereafter.
Student tax calculator
Students who only work outside of term time are at a particularly high risk of overpaying tax. To check whether you are paying the right tax, use the HMRC student tax checker.
Find out more: how to claim a tax rebate - get back what you're owed
Tax on sick pay and maternity pay
Any statutory sick pay or extra sick pay given under the terms of your employment is taxable. Your employer will deduct tax and National Insurance through PAYE in the normal way. Payouts from private sick-pay insurance schemes that you arranged and paid for yourself are tax-free.
Once your sick pay through work stops, you may be eligible for employment and support allowance (ESA). This state benefit is paid direct to your bank or building society account.
ESA could become subject to income taxable from the 14th week of receiving it. Tax will usually be deducted either direct from each payment before you get it or through PAYE on your earnings or pension if you also have income from these sources.
Statutory maternity, paternity or adoption pay is taxable. Any extra maternity pay your employer gives you under your terms of employment is also taxable. State maternity allowance is tax-free.
When you leave your job, you should get a P45 from your old employer. Give this to your new employer to ensure the correct amount of tax is deducted from your pay. If you don't have a P45, the alternative is to complete a starter form, as if you were starting work for the first time.
Any delay could generate an emergency code that may need to be changed later. You could end up overpaying tax and having to wait to have this refunded, or underpaying with a large clawback due once the code is issued.
Taking a second job
If you have several jobs, there's a higher risk of an inaccuracy in the amount of tax paid and this may result in tax being over or underpaid.
If you have more than one job, one of these will normally be treated as your main employment. You won’t have a P45 to give to your second employer, so you’ll need to complete a starter form.
If you find yourself simultaneously employed and self-employed, your personal allowance will usually be set against your PAYE earnings. You may be able to choose whether tax on your self-employment or other income is also collected through PAYE, on your earnings as an employee, or separately through the self-assessment system.
Losing your job
If you lose your job or are made redundant, you should get a P45 to take to your local Jobcentre Plus.
Any unused tax-free entitlement is set against the taxable amount of any income support or Jobseeker’s Allowance you get.
Any tax you have overpaid will be refunded at the end of the tax year (or when you stop claiming benefit if sooner).
When you return to work after a period of unemployment, you will need to fill in the form from booklet ES40, supplied by Jobcentre Plus. Return this to the Jobcentre, which will then issue you with a new form P45.
When you near retirement, you should inform your tax office, as your tax code needs to be changed.
It's likely you'll have less tax to pay, as you will no longer be earning income from employment, but you may still have to pay some tax on any other income gained, from savings and investments for example.
You may also be entitled to certain age-related tax allowances as you get older.
Find out more: tax in retirement - everything you need to know
- Last updated: April 2017
- Updated by: Gareth Shaw