“Why has my tax code changed?” How to answer payslip queries

Kim and Beth looking at a laptop

How do you feel when employees ask you questions about their payslips? Can you explain their payslip to them? Does it fill you with dread because, honestly, do you understand it all? If pay isn’t right, it causes stress and ill feeling, so it ‘pays’ to have the basics to hand. 

Having an understanding of the basic terms on payslips helps you answer any initial questions, but who can you ask for the trickier employee-specific questions? The care companies we work with appreciate that they can contact us to answer any more in-depth questions they might have.

The most common payslip questions we hear:

#Why has my tax code changed? And how will it affect my pay?

#Why are advances taken off my pay? And what are advances?

#What is the difference between Gross Pay and Net Pay?

#What about mileage? Is it taxable? How can I claim it?

Here are our quick explanations to help you answer your employees’ payslip queries:

#1. Why has my tax code changed?

The tax code is the amount you earn without paying tax, divided by 10, with a letter added. For example, Tax Code 1257L means £12,570 can be earnt before tax.

The amount of tax you pay depends on how much income you earn and how much tax you’ve already paid that year. It also takes into account personal allowance. Personal Allowance means the amount of tax-free income you can have in a year.

Tax code changes happen when you receive income from an additional job or pension, benefit changes or claims are made for expenses that you receive tax relief on. HMRC sends a letter when a tax code is changed – you have to update your payroll records with this as soon as possible.

New employees are likely to initially have an emergency tax code such as 1257 followed by W1, M1 or X. This happens when HMRC doesn’t get all the details they need in time, for example, if someone has changed jobs and not all their details are available. The HMRC website has a tool to check tax codes or contact HMRC by telephone. Employees need to contact HMRC themselves as it’s not something anyone else can do for them.

What do the tax code letters mean?

The most common tax code ends with L which means standard tax-free personal allowance. If it ends with M or N then Marriage Allowance will be factored in. OT at the end means the personal allowance is used up or they’ve started a new job and you don’t have enough details to get the right tax code. If the employee does more than one job, the tax code could be BR, which means the income they earn with you is fully taxed.

#2. My Payslip shows Advances taken off my pay. Why?

Advances relate to money that an employee has received ahead of the usual pay date. It relates to pay already earned. It’s not a loan because it’s not extra to their pay. Come payday their full pay is run and anything that has been paid to them early is deducted to give the remaining take-home pay. For example, if an employee had £50 for mileage in the middle of the month, their payslip would show the full amount of mileage earned in the payroll period. In this situation, there will be a separate line on the payslip showing a deduction of £50 so that the employee only receives the total amount due to them.

Salary advances are subject to income Tax and National Insurance and you must reported this to HMRC through PAYE. Failure to do this will result in penalties.

Some software used in the care industry will have a built-in advance facility that employees can draw on. Withdrawals can be capped to a percentage of pay and withdrawal fees are applied.

You can decide if you wish to grant an advance. If an employee asks every month for an advance on their pay, it could be an indication they may be struggling financially so you should talk to them about this.

#3. What is the difference between Gross and Net Pay?

Both of these appear on payslips.

Gross Pay – this is your income before any taxes and deductions. Your annual gross pay is your annual salary.

Net Pay – this is what’s left after deductions like income tax and National Insurance are taken off.  This is known as take-home pay.

As an employer, it is your duty to pay deductions to the relevant authority such as HMRC or pension schemes where relevant.

#4. My Mileage – do I get Taxed on mileage? How can I claim Mileage Tax Relief?

HMRC set a tax-free mileage rate. Mileage up to this rate is not subject to tax or NI and it must be clearly visible on the payslip. If, as an employer, you pay less than the HMRC approved rate, employees can claim tax relief on the difference through HMRC. They do this by following this link https://www.gov.uk/tax-relief-for-employees/vehicles-you-use-for-work

It is important to remember that you can only reimburse employees for business mileage, this excludes travelling to and from work.

Another key point is wait time and travel time, which unlike mileage, is subject to tax and NI.

Other items that employees can claim tax relief on include uniforms (if the company does not provide this) and professional membership fees if needed as part of their contract to work for you.

What other questions do have?

Are you struggling to efficiently run your payroll? It’s important to have a team who fully understands your care business and the payroll needs that come with it. We can ease the pain and save you time. Many business owners outsource their payroll to us at Fresh Clarity as they realise it’s a more cost-effective solution.

If you need help with your payroll, get in touch to see how we can help you.

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