How a Bookkeeper for small business owner calculates payroll (PAYE) deduction

Suppose your business has one employee earning a gross annual salary of £55,000. To calculate the taxable income, you will first need to deduct the Personal Allowance for £12,700. So the taxable income is:

£55,000 - £12,570 =£42,430.00

The £42,430 taxable income falls under the high earner tax rate band and hence a tax rate of 40% applies to part of the salary.

Hence, you need to know the employment Income tax salary bands. Suppose they are still:

Up £37,700 a 20% tax rate applies (standard rate)

From £37,700 to £100,000 a 40% tax rate applies (high earner rate)

Hence, the Bookkeeper for small business owner would calculate the taxable income as:

£37,700 x 20%  = £7,540.00

The remnant of the taxable income £42,430 - £37,700 = 4,730 will be taxed at 40% rate

£4,730 x 40% = £1,892.00

This mean that the Bookkeeper for small business owner would have calculated an employment tax liability for the employee of £7,540 + £1,892 =£9,432.00

This employment tax liability is deducted from the employee and is paid to the tax authorities by the employer using the PAYE system with a deadline of 22nd of the next tax month if you pay monthly. Alongside this there is the need to file PAYE every month using the FPS system on or before your employees’ payday, even if you pay tax authority quarterly instead of monthly.