What being on furlough means for your tax bill

Linda J. Dodson

For example, someone earning £70,000 a year would under normal circumstances receive the first £12,500 tax-free, then be taxed at a rate of 20pc on income between £12,501 and £49,999 and at 40pc on the remaining £20,000. This is divided by 12 to calculate monthly income. 

Workers on £70,000 a year would receive £5,833 a month pre-tax deductions. Removing the personal allowance, they are subject to tax on £4,791.33.

Of that £625 is paid for the portion at 20pc rate, while £666.67 at the rate of 40pc. This results in a take-home pay of £4,541.33 and a total tax bill of £1,291.60 a month.

However, if they are put on furlough and their monthly salary drops down to £2,500, they will only pay £291.6 in tax after their personal allowance. 

Sean McCann, of insurance firm NFU Mutual, said: “The personal allowance and tax thresholds are divided by 12 so if you earn less in one month you will pay less tax.”

He said anyone in this position should contact HMRC to notify them of the change.  You can check your tax code and personal allowance on the Government website and contact the department directly about changes that affect your tax code.

Workers who earn over £100,000 have a different tax code because of the personal allowance taper. They will be taxed at a higher rate despite their temporary lower salary.

The personal allowance is reduced by £1 for £2 of income over £100,000 until it disappears completely at £125,000. Workers in this situation must notify HM Revenue & Customs about their incorrect tax code due to the change in circumstances. 

Tax credits payments will not be affected for those working on reduced hours due to coronavirus or on furlough, the Government confirmed. 

Source Article

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